Accounts receivable factoring

accounts receivable factoring

Accounts Receivable (A/R) Factoring

Accounts Receivable Factoring is a form of Asset-Based Financing that helps a company gain access to capital through advances against their customer invoices.

A/R Factoring Companies can provide high advances and competitive rates. They can deal with most markets/industries and can work diligently to set up your access to funds rapidly.

Advantages of AR Factoring:

The most important advantage of Accounts Receivable Factoring is an enhanced and more predictable cash flow. You will not have to wait up to 60 or more days to get payment from your customers.

Additional Benefits:

  • Versatile financing able to grow as your business grows.
  • Straightforward onboarding and availability for small and newer companies.
  • Allows you to provide net 30 to 60-day payment terms to customers with the assurance you will still have working capital.

The A/R Factoring process – how does it work?

The Accounts Receivable Factoring program is straightforward and is suitable for most companies that carry receivables. Transactions are structured in 2 payments, using a format like this:

Payment 1: Client sends the Factoring Company a scan of the invoice you want to finance. The AR Funding Company transfers the initial advance into your bank account. This initial advance is normally around 70% to 90% of the gross invoice receivable value.

Payment 2: Your customer account pays the invoice based on regular terms (ie. 30-90 days. The Factoring Company will rebate you the residual 10% to 30%, less applicable charges for the advance, and complete the transaction.

A/R Factoring Cost:

Costs are based on the quantity of financing a company requires and the credit reliability of their clients. Receivables factoring rates range from 0.75% up to 3% per 30 days depending upon these criteria.

Most factoring companies will perform an analysis of a customer’s client base during the on-boarding process and look for potential risk aspects, such as:

  • Customer concentration: if a company has too much of their business volume from one or two clients, there is the risk that their business volumes could drop drastically if that client decides to stop doing business with the company. Also, if there is a disputed invoice or invoices, there is a risk that the customer will refuse payment making it difficult for both the business and the factoring company to reconcile the outstanding balance of the receivable.
  • Industry risks: companies that operate in certain industries can be a challenge for some factoring companies to finance. The construction industry, for example, can present billing challenges as longer projects can be subject to progress billing and holdbacks. This uncertainty of multi-stage billing and the potential for holdback amounts to remain withheld for extended periods of time can make the certainty of full collection questionable. Some factoring companies that do finance the construction industry will limit their advance rates or charge higher interest rates to help mitigate and compensate for the risk. Other industries where lien rights can be enforced can also create challenges for A/R funding businesses.
  • Long A/R Cycles: most invoice factoring companies will only advance funds against quality under-90 day accounts receivable. This can present some challenges for companies with longer collection times as factoring companies may require that the invoices over 90 days be repaid or replaced with current A/R. This could affect companies such as manufacturers that may invoice upon completion of the product but not get paid until the product is delivered to or even sold by the customer. In such cases, as with the industry risks noted above, factoring companies that will entertain such accounts will often seek a higher discount rate on the invoice or higher interest cost to carry the receivable. 

Qualifying for A/R Factoring:

Getting approved for A/R Financing is easy. The program is offered to companies of all sizes that fulfill these requirements:

  • Customers who pay their accounts in as much as 90 days.
  • Have good A/R management and invoicing processes.
  • Don’t have preventative encumbrances or liens against their accounts receivable.
  • Are clear of major taxation and legal issues.

A/r factoring resources:

Below are some good informational sources about Accounts Receivable Factoring:

Corporate Finance Institute

Secured Finance Network

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