How Does Accounts Receivable Factoring Work?

Any business that sells products and services is going to have accounts receivable as part of their financial profile.  Basically, accounts receivable refers to money that is owed to your business that is still outstanding.  This money is usually in the form of invoices that have yet to be paid.

Some companies that have a high number of transactions as a regular part of doing business may also have a high number of accounts receivable at any given time.  Sometimes, these businesses need to free up some cash while waiting for these accounts to be paid, which is where accounts receivable factoring comes in.

What Is Factoring?

Accounts receivable factoring or ‘financing’ refers to a transaction where a company essentially sells its accounts receivable to a third party for less than the amount of the account.  This enables the selling company to create a cash balance and continue to do business while waiting for the accounts receivable to come in.

Obviously, the companies or third party participants who buy the accounts receivable aren’t doing so out of the goodness of their hearts.  They charge fees for the service to make the transaction worthwhile for them, as well.

Reasons

The overriding reason to use accounts receivable factoring is to free up cash.  This may be necessary for a number of reasons.  A company may need the money to secure new contracts, pay its own invoices, or invest in its own growth.  Whatever the reason, selling the accounts at a discount is a historic business practice that makes it possible.  Some companies engage in factoring on an annual basis, just to keep the business flow moving.

Difference from Regular Loans

Accounts receivable factoring is not the same as a typical bank loan.  Factoring often makes funds available to a company when a bank wouldn’t.  A factor will look into the business that owes the outstanding balances to the company seeking the money.  A bank will only look at the credit status of the company seeking the money.

If the factor feels those accounts receivable will be paid in full, then they will usually go ahead and buy the accounts.  Bank loans will often cost less than factoring, but sometimes dealing with the banks simply isn’t an option.

Accounts receivable factoring makes it possible for many businesses to continue growth and continue operations without delay.

This post has been provided by Ruth Farber. Ruth was a financial consultant for small to medium sized businesses for over 20 years. She often recommended accounts receivable factoring for clients as the best mothod to finance their growth. For more information avout accounts receivables visit http://www.accutraccapital.com/Factoring/what-is-factoring.

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