How Does Accounts Receivable Factoring Work?
In today’s tight credit environment, more and more companies are turning to alternative and non-traditional financing options to access the capital needed to keep business running smoothly.
Several tools are available to owners of cash-strapped businesses in search of financing. Two of the most popular are factoring and accounts receivable factoring (A/R financing). Many business owners lump the two together, but few small yet significant differences exist.
Factoring is the outright purchase of a business’s outstanding accounts receivable by a commercial financing company or “factor.” Typically, the factor advances 70 to 90 percent of the value of a receivable when it purchases the receivable.
The balance, less the factoring fee, is released when the invoice is collected. The factoring fee — which is based on the total face value of the invoice, not percentage advanced — typically ranges from 1.5 percent to 5.5 percent, depending on aspects such as the collection risk and how many days the funds are in use.
Under a factoring contract, the business can usually pick and choose which invoices to sell to the factor-it is not typically an all-or-nothing scenario. Once it purchases an invoice, the factor manages the receivable until it is paid.
The factor will essentially become the business’s credit manager and accounts receivable department, performing credit checks, analyzing credit reports, and mailing and documenting invoices and payments.
Contact Porter Capital today to discuss where your business may fall in the percentage range.