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Service Details |
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| Receivable Financing & Factoring |
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Accounts receivable financing (also known as accounts receivable factoring) is the process of selling a company's accounts receivable to a factoring business who then assumes the risks involved in collecting debts. As debtors settle their accounts, the factor receives all profits. The original company sold their accounts to the factor at face value (minus a small discount) for a cash profit which the company can than use for business expenses. A company that partakes in account receivable financing is unsure that they will collect all the money owed to them and believes that it is more profitable to sell the accounts to a factor than assume the risks of not receiving debts. |
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| The cash profits received from accounts receivables financing are not a loan, and therefore the original company is not expected to pay the factoring business any fees at a later date. The factoring business makes their money off of the debtors' invoices they have purchased. However, the company cannot expect to receive any profits from the debts owed to them other than the cash paid upon the original sale. Account receivable finance is non-recourse, and is therefore an elimination of any bad debt within the company and adds a boost of quick financing when a company's lack of profits seriously affects them financially. |
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Because accounts receivable finance is not a loan, there are several benefits that make the use of receivable financing aid a wise business maneuver. Account receivables factoring does not directly affect the credit of a company. Companies do not give up equity as they would with taking on new partners or investment capital. Having a large sum of cash at an early date (before debtors are required to settle their accounts) allows a company to take advantage of supplier volume discounts and supplier early payment discounts. Similarly, a company is no longer expected to absorb the loss of offering early payment discounts to their debtors.
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Most businesses that work on credit (particularly those that supply goods or services to other companies) can qualify for accounts receivable financing. In some factoring companies, other requirements may exist, but typically all that is required of a business to qualify is a period cash flow more than two or three times a year, as well as a need for working capital to support processes carried out within the business. In order to qualify, a business needs to prove that factoring receivables is a smart business plan because they plan to take advantage of the profits received from the sale with long-term beneficial financial choices.
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Although many factoring companies provide financing to a wide array of companies, some cater specifically to particular companies or particular types of invoice factoring. Larger, more successful factoring companies may require that a company generate a specific amount of revenue to qualify for receivable financing. Some businesses allow only LLCs to qualify, and specifically avoid companies run by a sole proprietorship or a partnership. While most factoring companies work with all types of invoice factoring, some are specifically designed to provide relief for either business receivable financing or medical receivable financing.
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