Complete Guide to
Accounts Receivable Factoring
Invoice Factoring or Accounts Receivable Financing is a form of asset-based lending that factoring companies provide to businesses. Invoice factoring eliminates the cash flow delay caused by extending trade credit terms for services rendered or goods sold to customers.
Is invoice financing right for me?
Often, businesses don’t qualify for bank financing or don’t have time to get a bank loan. Common reasons for not using bank financing include
- You don’t have 2 to 3 years history of profitability.
- You don’t meet all the requirements for a bank loan.
- You simply can’t wait 2 or 3 months for a bank loan approval.
If you ‘re having heart problems, you need a doctor. It’s no different when your business is suffering from cash flow problems. Cash shortages create all sorts of problems including missed payrolls, upset vendors and potential bankruptcy. When you need cash, you’ve got to get it and get it quickly.
Accounts receivable factoring...
step by step
The accounts receivable factoring process begins with the completion of selling your product or service to the final step of receiving your final payment.
- Complete your services for your customer.
- Send your invoice to the factoring company.
- The factoring company verifies the invoice is correct and valid.
- The factoring company funds your bank account.
- The factoring company forwards the invoice to your customer.
- The factoring company collects the receivable from your customer.
- The factoring company sends you the reserve as final payment.
The entire process is repeated for each invoice or batch of invoices that you factor. At any time, you can request reports that show your outstanding invoices, paid invoices, and past-due invoices.
If you send the invoice directly to your customer, then you’ll send a copy of the invoice to your factoring company.
Factoring companies typically fund your bank account within 24 to 48 hours of verifying your invoices. The amount funded is the invoice amount less the reserve which is determined by the advance rate.
Factoring companies deduct their factoring fees from the funds sent to your bank account or from the final payment.
Some factoring companies require you factor all your invoices. Many factoring companies allow you to select only the customers or invoices that you want to factor, giving you more flexibility and control.
Consider the following
Invoice financing can be as effective as bank financing, sometimes even better. Here are some things to consider when determining if invoice financing is right for you.
Invoice financing benefits
The biggest advantage of accounts receivable financing is improved cash flow, but there are many other benefits to factoring services.
Improved Cash Flow
Accounts receivable financing improves your cash flow because you don’t have to wait 30, 45 or 60+ days to collect your receivables. You get the cash quicker so you can pay for supplies, payroll and other operating expenses.
No Loans or Debt
One of the best features of receivables financing is it doesn’t involve debt or loan payments. Invoice factoring allows you to manage your cash flow without incurring risky debt.
Peace of Mind
Nothing compares to having stable cash flow for your business. Receivables factoring provides you confidence and assurance so that you can focus on more important matters.
Factoring companies handle your accounts receivable management such as billing, collections and reporting. Factoring your receivables can often pay for itself in man-hours saved if you performed these in-house.
Business Credit Services
Factoring companies analyze your customers’ credit risk as well as credit limits so you don’t get over-extended with a customer which protects you from bad debt losses.
Quick and Easy
Many factoring companies can approve your factoring application within several business days. Often, you can get your first funding within 5 to 10 days. Invoice factoring is usually a quick and easy process.
Invoice factoring rates
Invoice factoring rates depend on several criteria such as sales volume, industry risk, and AR days outstanding. Rates can vary anywhere from 1% to 6% depending on the particular situation for your business.
Invoice factoring rates vary according to your monthly factored sales volume. Higher volumes usually lower your rates.
Your A/R collection days can have a big impact on your factoring costs, especially when you are charged an adjustable rate.
Your customers’ credit ratings may affect your factoring rates. Creditworthy customers usually lower your rates.
Some industries involve more risk or complexity. Construction and international receivables usually increase your rates.
|Type of rate||Rate||60 days||45 days||30 days|
|Flat (fixed) rate||3.5% flat rate||$3,500||$3,500||$3,500|
|Adjustable rate||0.7% per week||$6,300||$4,900||$3,500|
|Adjustable rate (pro-rated)||0.7% per week||$6,000||$4,500||$3,000|