The Complete Guide to

Accounts Receivable Factoring

Accounts receivable factoring is a type of asset-based lending that factoring companies provide to businesses. Factoring eliminates the cash flow crunch of 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.

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 moves working capital from accounts receivable to cash so you can better operate your business.
Invoice financing operates much like a traditional line of credit as long as you spend the funds on operating expenses; not equipment, long-term debt or family vacations.
Very simply, invoice financing makes sense if it helps you generate more revenue than it costs or if it keeps your business from suffering due to cash flow issues.

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.

  1. Complete your services for your customer.
  2. Send your invoice to the factoring company.
  3. The factoring company verifies the invoice is correct and valid.
  4. The factoring company funds your bank account.
  5. The factoring company forwards the invoice to your customer.
  6. The factoring company collects the receivable from your customer.
  7. 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.

Invoice factoring is great for cash flow.

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.

“If you got paid for sales the instant you made them, you would never have a cash flow problem.”

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.

Receivables Management

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.

Sales Volume

Invoice factoring rates vary according to your monthly factored sales volume. Higher volumes usually lower your rates.

Collection Days

Your A/R collection days can have a big impact on your factoring costs, especially when you are charged an adjustable rate.

Customer Credit

Your customers’ credit ratings may affect your factoring rates. Creditworthy customers usually lower your rates.

Industry Risk

Some industries involve more risk or complexity. Construction and international receivables usually increase your rates.

$100,000 invoice amount

Compare factoring costs at 30, 45 and 60 A/R collection days.

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

Factoring service agreement

Become familiar with the application process before signing a factoring agreement. Most agreements are similar but they are legal documents. If you’re not comfortable with the language then consult an attorney.

Completing the application

A typical factoring application requires a list of your customers, an accounts receivables aging, and sometimes financial statements. You'll also provide the factoring company with personal and business information.

Evaluating your risk

Factoring companies must evaluate the risk of factoring your receivables. They analyze your customers' credit as well as your business situation. If they determine the risk is too high, then you may not get approved.

Signing the agreement

You'll sign the factoring agreement as well as other required documents such as a personal guarantee. The agreement or contract terms include the contract period, factoring rates, cancellation fees and other terms.

Filing a UCC-1 statement

Your factoring company will file a UCC-1 financing statement to give notice that it has an interest in your accounts receivables, and possibly other business assets.

Choosing a factoring company

Do I need an industry specialist?

Look at factoring companies in your industry. Many industries such as business services, staffing or manufacturing are commonly served, but some niche industries require a certain expertise or specialty. Niche industries include foreign receivables, construction, healthcare and trucking.

What are the terms?

  • Do they charge an application or startup fee?
  • How long is their contract... 30 days, one year, 2 years?
  • Do I have to factor all my invoices?
  • Do they charge a monthly minimum fee?

What are the costs?

Get an idea or ballpark of your factoring costs based on your monthly sales volume and receivable days outstanding. How do they calculate my fees... do they use a flat rate or an adjustable rate? How does the factoring rate impact my costs if my collection days run longer than expected.

Is the company a good fit?

When talking to the company salesperson, pay careful attention to his or her attitude. Are they genuinely interested in my business? Do they understand my needs? Is the person attentive, knowledgeable and responsive.

Do I want a local factoring company?

Decide if you want a factoring company in your city or state. FactoringClub has a complete directory of factoring companies and where they're located.

Are you ready to find your factoring company?

Experts are ready to help you.