What is Accounts Receivable Factoring?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 February 2018
  • Copyright Protected:
    Conjecture Corporation
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Accounts receivable factoring is a business service that allows companies to receive advance payments on the total value of invoices issued to customers on a weekly, biweekly, or monthly basis. Factoring companies essentially purchase the teceivables from a company, and receive customer payments on those outstanding invoices until they are paid in full. In exchange for buying the invoices and managing the collections process, the factoring company keeps a small percentage of the total value of the invoices.

The process for accounts receivable factoring is simple. A company approaches a factoring service and offers to sell the service their most currently billed receivables. If the service finds the company to be worthy of the risk, they accept the company as a client. The bulk of the value of the current Receivables is provided in one lump payment. Customers remit payment to the factoring company, usually using a drop mailbox address set up by the factoring service. As the invoices are paid, the service issues additional payments to their client, making sure to keep a portion of the collected funds as payment for the service.

As part of the accounts receivable factoring agreement, the factoring service takes over the process of collections on the invoices purchased from the client. This means that any customers of the client who do not pay the invoices according to terms are usually contacted directly by the factoring company. In the event that a client fails to pay for an outstanding invoice, the factoring company resells the uncollected invoice to the original business, and will not factor any further invoices issued to that client.

There are several situations where a business may choose to utilize an Accounts Receivable factoring service. One has to do with cash flow issues. When the company goes through a difficult financial period, they may need money from the latest round of invoicing to remain current on their debt obligations. Since a factoring company will pay the business up to 80% of the value of the latest issued Receivables immediately, the business can pay their bills on time, thus maintaining their favorable reputation among their vendors.

Another instance where accounts receivable factoring can come in handy is during recovery from a failed merger or takeover attempt. Events of this type often leave a company with little to no reserves. In order to continue meeting payroll and honoring their debts, the business can work with a factoring company to receive the bulk of the value of the invoices in advance, and most of the remaining value as their customers make payments to the factoring company on those outstanding invoices.

There are a number of accounts receivable factoring services on the market today. Most offer similar payment plans, although it is always a good idea to look closely at the terms and conditions involved with each accounts receivable factoring strategy. Some plans will offer higher up-front payments or a lower percentage collected as a service fee. There are also some differences in how the two parties can successfully terminate the working arrangement. Taking the time to compare plans before committing to any one factoring service can go a long way toward preventing problems arising at some future point.



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