Overview
Accounts receivable factoring refers to
receivable capital in the form of unpaid invoices that do not have a
lien placed on them. They are sold to institutions for discounted
prices. This means that you will sell invoices, for which you have not
received payments, to institutions for a lesser price than the original
invoice value.
How It Works
It is different from a bank loan in that it is not a loan to be
repaid and the emphasis is on the value of the receivables. Institutions
sell their invoices to the factoring company and collect the full
amount. The factoring company then takes care of collecting those unpaid
invoices. In other words, it is outsourcing the receivables collection
process. This is an extremely effective method for companies to get
access to capital they desperately need.
Benefits
Accounts receivable factoring offers many benefits to the businesses.
The main benefit is that you will be able to have access to capital
without having to use your credit to do so. In fact, you will actually
be using the credit of your customers in order to have access to this
capital as the factoring institutions will rely on the worthiness of
your customers' credit in determining whether or not they wish to
purchase your invoices. Another great benefit of accounts receivable
factoring is that you are not required to utilize any type of loan or
borrowing process. This is ideal for many businesses that need money
they have rightfully invoiced and simply cannot wait 60 or 90 days to
receive the payment.
Cost/Pricing
Some of the major concerns companies have when it comes to accounts
receivable factoring are the costs involved. The only cost you will
incur is the money you will lose on the amount invoiced after you have
sold them for a discounted price to an institution. This is a relatively
low cost for the amount of benefits you will receive when utilizing
accounts receivable factoring.
Timing
Institutions generally go for accounts receivable factoring when they
do not have any hope of getting back the unpaid invoices and when they
are in need of money. In such cases, the factoring companies may provide
the cash worth the unpaid invoices at a discount. They do not require
any business plan or tax statements. They are just an instant form of
cash.
Companies/Industries
There are many companies and institutions that provide accounts
receivable factoring services. The good news is there are more and more
of these companies coming up regularly as this practice started becoming
popular. One of the first things you should do is contact your
financial institution to get its recommendations for these types of
services.
