Understanding Accounts Receivable FundingAccounts Receivable Funding is the process of exchanging a company’s accounts receivable for working capital. |
The company that buys the accounts receivable is a “factor”, and the company that sells its accounts receivable is the “client.” Usually, the factor will advance 50 to 90 percent of the accounts receivable up front and will pay the remaining amount — minus a nominal service fee — after the client’s customer pays the invoice. |
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Benefits of Accounts Receivable FundingAccounts Receivable Funding allows a client immediate access to working capital, instead of waiting for customers to pay their invoices. |
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- Unlimited Capital — Factoring
focuses on a client’s sales, not assets. As sales increase, more
capital becomes available to the client to meet the demand for its
products/services.
- Early Payment Discount — Factoring
can provide funds necessary to pay off suppliers early and receive
discounts.
- Volume Discounts — With
more working capital, a client can save money on buying in volume discounts.
- No More Early Payment Discounts for
Customers — Since clients receive funds immediately
from factoring, they can stop offering costly, early payment discounts.
- Improved Equity — When
clients use a factor, they don’t need new business partners or
to give up equity.
- No Debt — Because
factoring entails the sale of assets, it is not a loan, no debt is
incurred. Clients’ balance sheets will improve, making it easier
for them to obtain other types of financing.
- Better Credit — Factoring
allows clients to pay their employees, taxes, and bills on time. By
establishing a good credit rating, clients may be able to obtain better
terms from suppliers and qualify for loans.
- Quick and Easy Funding — The
factoring application takes less time and effort than other forms of
financing — no tax returns, personal financial statements, business
plans or projections are required.
- Ability to Leverage Customers’ Credit — Funding
decisions are based on creditworthiness of the clients’ customers;
clients don’t have to be in business for years or have perfect
credit to receive funds.
- Early Payment from Customers — Many
customers will pay factored invoices faster than non-factored invoices.
- Early Warning for Customer Problems — Because
factors verify invoices with customers, they can tell if there’s
a customer service problem right away, before it’s too late to
save the account.
- Access to Financial Reports — Weekly
reports to clients tracking customers’ invoices and payment history.
- Accounting Services — Factors
can function as a client’s receivables department.
- Types of Factoring (decisions
made on a case-by-case basis, clients are notified during the application
stage)
- Recourse factoring — the
factor reserves the right to seek repayment from the client if its
customers can’t pay their invoices.
- Non-Recourse factoring — the factor takes responsibility of the invoice in the event the client becomes insolvent.