Accounts Receivable Factoring Guide

Accounts receivable factoring is a financing method that allows businesses to turn invoices into capital.

Instead of waiting for clients to pay their invoices, accounts receivable factoring allows you to receive an advance on the money you are owed. You can then use this advance to invest in your business’ immediate needs.

This type of financing is ideal for businesses that need money to finance daily operational expenses and business growth ventures.

How it Works

Accounts receivable factoring is a simple process that starts once you sell your goods or services to customers. 

The process is as follows:

1. After providing goods or services, your business sends an invoice to your customer.

2. Your business sends a copy of the invoice to an invoice factoring company.

3. The financing company then provides funding, which typically covers 70% to 90% of the invoice amount.

4. Once the invoice is paid, your business keeps the remaining invoice amount, minus a fee.

This financing method allows businesses to quickly add to their working capital while waiting for customers to submit payment.

Essentially, you are selling your outstanding collectables to a factoring company in exchange for immediate funding.

Types of Accounts Receivable Factoring

There are two primary types: recourse and non-recourse.

Recourse

With this type of factoring, business owners are liable if customers do not pay the invoice on time.

If the customer fails to pay, you must cover the costs and purchase your invoices back from the factoring company.

As this type of factoring is less risky for the factoring company, it is typically more affordable and easier to qualify for. 

Non-Recourse

With non-recourse factoring, you are not liable if your customers fail to make payment.

As a result, this type of factory is generally more difficult to qualify for. Additionally, you will likely be subject to higher fees.

Lastly, in order to reduce their risk, factoring companies may decline to purchase invoices from customers with low credit and poor payment histories.

Benefits 

Accounts receivable factoring offers a number of benefits to businesses, including:

• Access to immediate funding

• The ability to quickly build business credit

• Easy to qualify

• Ability to pursue new market opportunities

• Don’t have to worry about repayment schedules

These benefits, among others, make this a great option for most businesses in need of funding — particularly businesses that may not qualify for a traditional business loan.

How Much Does it Cost?

Costs depend primarily on three factors: rates, service lengths, and additional costs.

Rates

Factoring companies set their own rates. Typically, rates will fall in the range of 0.5% to 5% of the total invoice amount per month. Rates tend to go down as your factor more invoices.

Service Length

The service length is essentially the same as the repayment term for traditional loans.

The shorter the service length, the less your overall costs will be. It’s important to carefully review your financing terms with your factoring company to calculate your total costs.

Additional Costs

Factoring companies may charge a number of additional hidden fees, including:

• Termination fees

• Monthly minimum fees

• Due diligence fees

• Maintenance fees

• And more

Like with traditional loans, it’s important to review your terms to ensure you are aware of all the additional costs you may be responsible for.

Find an Accounts Receivable Factoring Company

Finding a suitable factoring company is very similar to shopping for a business loan lender.

The most important step is to thoroughly compare multiple companies to find the one the meets your needs.

Be sure to review rates, service lengths, and any additional hidden fees to ensure that you can receive the funding you need and can afford to pay back the factoring company.

Popular factoring companies include:

• BlueVine

• TCI Business Capital

• Paragon Financial Group

• altLINE

• Payability

While these are a few of the leading factoring companies, it’s important to do your own research to find the right option for your business.

Frequently Asked Questions

How Quickly Can I Receive My Funds?

Disbursement times depend entirely on the factoring company that you choose.

That being considered, once your account has been set up, your application has been reviewed, and invoices have been delivered, funds can be disbursed in as little as just a few hours.

What is an Advance Rate?

The advance rate is the amount of the invoice that you will receive upfront.

For example, if your advance rate is 80% and the invoice amount is $1,000, you would receive $800 upfront.

Why Choose Factoring Over a Traditional Business Loan?

Accounts receivable factoring is a particularly great option for businesses that don’t meet the requirements for a traditional business loan. 

Additionally, it allows you to receive financing without worrying about paying back debt since the factoring company is paid back once the customer pays the invoice.