Accounts Receivable Factoring 101

Rick Hultz

Invoice factoring is the sale of accounts receivable at a discount before the invoice due date. Your company receives its cash as soon as you invoice your customers, instead of waiting the usual 30, 60 or 90 days later. Since cash is the lifeblood of your company, an interruption of cash flow can have serious, if not fatal consequences.

Most traditional bank lenders cannot respond quick enough to small businesses that need immediate funding. Quick response time is one of the major benefits of factoring companies. You can get approved for invoice factoring within 3 to 5 days and secure funding within 5 to 10 days.

Invoice Financing Grows with your Business

As your sales grow, accounts receivable consume more and more of your company’s cash. If cash flow slows down, then your company must stop selling goods or providing services until you collect your outstanding accounts receivable from your customers. This situation causes lost profits and harms your customer relationships.

As your company’s sales grow, so does your accounts receivable. As your receivables grow, so does the amount of cash tied up in those receivables. Fortunately, you can increase cash by selling your accounts receivable to a factoring company. The factoring company buys the receivable after you have delivered you product or service. Typically, you send your invoices to the factoring company. The factoring company wires you cash within 24 hours. The factoring company then forwards your invoices to your customers and collects the receivables as they come due.

Why Should You Consider Invoice Factoring?

Your can benefit from factoring services if your business is experiencing any of the following challenges:

  • A new product or service
  • Sales growth outpacing cash
  • Unpredictable cash flow
  • Clients not paying on time
  • Seasonal sales spikes
  • Trade discounts not taken
  • Irregular cash receipts
  • Not meeting payroll

Common Uses of Better Cash Flow

Accounts receivable factoring enables your company to receive cash without waiting 30 to 90 days or more. The immediate cash flow allows your company to

  • Increase cash for payroll and other operating expenses
  • Purchase inventory to generate more sales
  • Receive volume discounts on purchases
  • Receive discounts on trade payables
  • Avoid late charges or penalties on payables
  • Reduce overhead costs associated with in-house collections and credit
  • Incur fewer bad debt losses due to better risk management

Factoring companies charge a factoring fee for their services. Fees typically include two components - a factoring fee for the credit and collection services and an interest charge based on the invoice’s outstanding days. Often these two rates are combined into a single factoring rate. Factoring fees vary based on the credit-worthiness of your customers, monthly sales volume, and number of invoices.

When Should You Begin Receivables Factoring?

If your cash flow fluctuations cause a burden on your company’s ability to pay its bills, employees or suppliers, then you need invoice factoring. Factoring companies can quickly respond to your cash flow needs. Businesses that are wise enough to utilize invoice factoring will experience easier and smoother cash flow cycles.

Businesses usually employ factoring services during tight money situations. When your working capital improves enough to weather the ups and downs of sales volume, then you can eventually move into a more conventional bank line of credit. Most factoring companies have short term cancellation notice terms in their contracts to allow you to cease factoring when there is no longer a need for additional working capital. 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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