What is Accounts Receivable Factoring?

So, what is actual accounts receivable factoring? This is a condition when a company needs to acquire money or cash quickly to maintain or hold business operations, in this situation the company may sell off accounts receivable. So, in short, factoring is a transaction in which a company sells accounts receivable, or invoices, to a third party commercial financial company. By doing this kind of thing, the company can get or gain an influx of cash to sustain through a financial crisis. Some company may do this in order to receive cash more quickly than it would by waiting 30 to 60 days for a customer payment. Factoring is sometimes called “accounts receivable financing.”

Terms and Condition

Every various industry and financial services have their own term and conditions of factoring. Most of the factoring companies or services will purchase your invoices and advance you money within 24 hours if there are no problem in the administration. The advance rate can range from 80% to as much as 95% depending on the industry, your customers’ credit histories, and other criteria.

For your information, factoring is not kind of a loan, it's not same as a loan. No debt is assumed by factoring. The funds are unrestricted, providing a company more flexibility than with a traditional bank loan.

The principal of accounts receivable factoring

Actually, there are three principal parts to "advance" factoring transaction:

  • First is the advance, a percentage of the invoice's value that is paid to the seller at the time of sale.
  • Second, the reserve, the remainder of the purchase price held until the payment by the account debtor is made.
  • Third is the discounts fee so in this situation the cost associated with the transaction which is deducted from the reserve, along with other expenses, with the collection, before the reserve is disbursed to the factor's client.