A Guide to Accounts Receivable Financing

A Guide to Accounts Receivable Financing

Accounts receivable financing (accounts receivable factoring, or just factoring) is a solution that allows business owners to turn unpaid invoices into fast cash. Rather than waiting for your customers to pay, you get quick access to money, allowing you to pay your bills and grow your business. Here’s what you need to know to determine if it’s the right solution for you.

Reasons for Accounts Receivable Factoring

Accounts receivable financing is an excellent option for business owners who handle several invoices and who need cash quickly. It eliminates waiting for customers to pay their invoices, giving you what you need now without accruing additional debt.

Some reasons why business owners choose factoring include:

  • You want to take on bigger jobs, but don’t want to take out a loan.
  • You don’t qualify for a loan.
  • You need another source of capital.
  • You want to meet short-term needs without feeling a cash crunch due to uneven cash flow.
  • You want to be able to pay your bills, but also have enough left over to jump on an opportunity should one arise.

How Factoring Works

Factoring begins after you provide goods or services to creditworthy customers. You’ve sent them their invoices, but they haven’t paid yet.

Typically, you would follow the following steps:

  • After sending the invoice to the customer, you send a copy to the factoring company
  • The factor provides you with 70% to 90% of the total value of the factored invoices
  • Your customers pay their invoices
  • You receive the remaining amount, minus the cost of factoring (and other applicable) fees