How Does Receivables Factoring Work?

Rick Hultz

One of the main concerns for small and medium businesses is cash flow. Accounts receivable factoring provides a reliable and efficient method of collection for businesses that don't have large reserves of cash on hand. Factoring companies help growing businesses improve cash flow and provide an alternative to traditional bank financing.

Overview of Accounts Receivable Factoring

With receivables factoring, a business sells its accounts receivable to a factoring company in order to get paid as quickly as possible. Traditional payments may take 30 to 60 days, and late payments can prove painful for a business operating with little or zero reliable cash flow.

Factoring is sometimes known as accounts receivable financing, and the terms of these agreements usually depend on a few factors including the industry in which the business operates and the credit history of the businesses or clients from which the factoring services must collect payment.

The amount of the advance the company receives from the factoring company may vary somewhere between 80% and 90%, but those figures aren't set in stone. One of the benefits of working with factoring companies is that the transaction is not a loan. The funds don't have loan covenants or installments like a bank loan.

Invoice Factoring Process

After selecting your factoring company, the factoring process follows these steps:

  1. You sell goods or services to your customer.
  2. You send the invoice to your factoring company.
  3. Your factoring company sends you cash based on the invoice and advance rate.
  4. Your factoring company sends the invoice to your customer.
  5. Your factoring company collects the receivable from your customer.
  6. Your factoring company sends you the remaining reserve minus its factoring fee.

Without invoice factoring, you might have to wait two or three months to receive payment. Using accounts receivable factoring, you can take the collections waiting out of the cash flow equation.

Invoice factoring also reduces the man-hours you have to spend on collections. Receivables factoring allows you to outsource collections to the factoring company. Often, this can pay for the services of a factoring company.

Factoring in Post-Recession America

Start-up businesses require operating cash which is difficult in today's lending environment. Invoice factoring has become popular during the 2008 recession recovery due to the tight lending environment and the banks' tight lending regulations. New or small businesses can use factoring services much like a traditional line of credit.

Getting clients to pay on time is essential for guaranteeing cash flow, and delays can seriously impact growth opportunities for small businesses. Late payments have a cascading effect on the business's operations. Factoring services help minimize the problems caused by late payments and the cost of time spent on collection activity.

Factoring companies didn't just come about after the recession. The concept of invoice factoring has been part of the business world for many centuries. Factoring was popular in Europe during the Renaissance, and it was also part of our economy when the Pilgrims made their way across the Atlantic Ocean.

Who Should Use Accounts Receivable Factoring?

Cash flow is important to all companies whether they've been in business for a few months or decades. Small and medium-sized businesses use factoring to help cash flow. Businesses in every industry and segment of the economy use receivables factoring to operate their business and keep cash flow running smoothly. is the premier source of information for invoice factoring companies. With factoring companies in most major cities and states, FactoringClub helps you find the right factoring company. Search our listings or call our factoring experts at (866) 748-7111 for assistance.

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