What Is Accounts Receivable Factoring?
Here’s how factoring accounts receivable works: The business sells its unpaid receivables or invoices to a third party, or a “factor” for a small discount. Even though payment for the product or service hasn’t come in yet, the business is paid by the factor right away. It is then the responsibility of the factor to collect payment from the late-paying customer. Don’t worry: The factor will not “chase down” the customer and endanger the relationship with the borrower.
When the factor collects the payment, the business is paid whatever was missing from the first payment, minus a percentage. The discount and percentage are the factor’s fee; similar to interest on a traditional small business loan.
Accounts receivable factoring, however, is not technically classified as a loan, meaning it does not show up as “debt” on your balance sheet. And because the factor is being paid by your customer, not the borrower, accounts receivable factoring is likely accessible by borrowers with bad credit. The factor is not concerned about the borrower’s ability to pay them back. But the factor might not be willing to buy an unpaid receivable if there is a chance the customer will not pay their bills.
What Do I Need Accounts Receivable Factoring For?
The benefits of shortening your business cycle from months to just a few days are virtually endless. Arguably the most important are increasing your bottom line and saving money. The longer an account goes unpaid, the more damage it does to profit margins and operational funding. Accounts receivable factoring allows you to quickly put money back into your business. You always have money available for regular or unforeseen expenses, and can your suppliers ahead of schedule. This will likely make you eligible for discounts and good credit references since you have shortened their business cycle as well.
Another major reward is predictability, or the ability to schedule your upcoming investments or plans for expansion. With accounts receivable factoring, you can serve a customer with the knowledge that you’ll be paid almost immediately afterward. Your plans or expenses can therefore be coordinated with your invoices or the signing of new accounts.
Speaking of new accounts, you can now extend more credit than your competitors to potential customers. Larger customers are notorious for slow payment cycles, but now there’s no limit to who you can do business with.
You can also use the money you get from the factor for almost anything. This includes getting out of a financial pinch or smoothing out longer-term cash flow. Other investments commonly associated with growth are buying inventory in bulk, securing new equipment, hiring more workers, or launching a new marketing campaign.
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Regardless of why you need the money, you will be shocked to learn how much more productive you can be when you don’t have to spend your days trying to collect payments from late-paying customers! Apply now to see how much you qualify for!