People Also Ask:
Is Accounts Receivable Factoring a Loan?
Accounts Receivable Factoring is sometimes called an “Accounts Receivable Loan.” This can be misleading because technically speaking, Accounts Receivable Factoring is not categorized as a “loan.” It does not show up as “debt” on your balance sheet.
Similarly, a Merchant Cash Advance is not categorized as “debt” either. This is because both products involve a sale to the business lender. With Accounts Receivable Factoring, you are selling invoices. With a Merchant Cash Advance, you are selling a portion of your future debit and credit card sales.
Why Do Businesses Factor Their Invoices?
Larger businesses are notorious for being very slow to pay. They often pay after the due date, and may even request terms of over 30 days. Smaller companies cannot afford to extend that kind of credit. However, larger companies also make more substantial orders, and maintaining the partnership can do wonders for your reputation.
With Accounts Receivable Factoring, smaller businesses can offer longer terms to entice larger customers. The tiny loss of income is a fair price for expanding their customer base to this level.
What Else Can Businesses Do To Get Paid On Time?
Since Accounts Receivable Factoring comes with a cost, it should only be pursued if you’ve exhausted every other solution for getting paid on time. For example, you might not be making your invoices clear enough. The customer might delay the payment simply because they can’t figure out what they’re being charged for, or when the payment is due.
Your invoice should display the following information:
- Invoice number
- Client’s name
- Your business name, address, contact info and tax registration number (if required)
- Number of hours worked (for service calls)
- Hourly rate or unit price
- Any taxes charged
- Due Date
- Payment Terms
- Material descriptions and pay rates (if applicable)
Another possibility is that your business doesn’t offer your customer’s preferred method of payment. They might prefer wire transfers or electronic payment services like PayPal, Stripe, or Square.
Lastly, consider offering an incentive for paying on time. Many businesses have found that this is the only way to get customers to follow their terms. You could offer a 2% discount for customers who pay in 30 days.
Every business lender has its own time frame for this scenario. However, most of them have the same penalization policy.
Accounts Receivable Factoring involves two payments. The first occurs when the business lender purchases the invoice, and the second occurs when the business lender collects from your customer. If the business lender cannot collect from your customer within the agreed-upon time frame, they will usually keep the second payment. So, before factoring your invoices, find out their payment deadline for keeping the second payment instead of giving it to you.
Will My Customer Find Out I Sold Their Invoice?
No, we will not tell your customer that you sold their invoice. We are also well aware that the way we collect the payment reflects upon you. Rest assured, the relationship you have with your customer will not be affected. The process of turning the invoices over to us is incredibly simple and stress-free for your customer. There’s a good chance you’ll find out that some of your customers are already sending payments to other factoring companies.
Is Accounts Receivable Factoring The Same As Invoice Financing?
These two terms sound alike but are very different. Like Accounts Receivable Factoring, Invoice Financing allows you to access financing based on the value of your receivables. But with the latter product, you aren’t selling your receivables to the business lender. Instead, the receivables merely act as collateral for a loan. And you are still responsible for collecting the payment from your customer.
Can I Get Accounts Receivable Factoring with Bad Credit?
Yes, Accounts Receivable Factoring is available for borrowers with bad credit. It’s the creditworthiness of your customer, not you, that matters most with this product. In most cases, your credit score literally has zero impact on the cost of Accounts Receivable Factoring.