Accounts Receivable Factoring: Everything that You Wanted to Know!

Most businesses are required to extend some form of credit to their buyers, so it may well take 30 to 60 days for an issued invoice to be paid up. In the meanwhile, the organisation's liquidity is trapped in the account receivables and all the business owner has in hand are the invoices.

Unfortunately, these do not hold merit when settling the payment of the debtors and employees. The situation can quickly lead to a cash flow crunch in a growing business. To add to the woes of the business owner, securing traditional finance can be a harrowing task in the current economic scenario, particularly if they do not have a bricks and mortar collateral to bargain with.

This is where accounts receivable factoring steps into the picture; it is an effective way of freeing tied up liquidity and ensuring that the company always has room for growth. Despite its many advantages, factoring invoices for fund is among the most misunderstood forms of business finances.

Au contraire to popular belief, accounts receivable factoring is not just for cash strapped organisations; while it was once regarded as a bailout for businesses facing financially precarious times, today it has been accepted as a form of mainstream business financing with organisations of all sizes using factoring to fill the gaps in cash flow. One of the primary advantages of using accounts receivable factoring is that it helps to get your hands on some much-needed working capital. If you are seriously mulling over choosing factoring instead of a loan, here is a look at what this option entails.

What is accounts receivable factoring?

Factoring invoices for funds is a transaction between three parties, the seller, the buyer and the factoring company. Unlike traditional forms of finance where the business owner's credit worthiness will have a bearing on the eligibility of the organisation to procure a loan, with factoring, it's your customer's credit that makes a difference.

To understand how factoring works, imagine being able to sell your invoice at full face value as soon as it has been issued. The factor pays you the complete amount less a small fee in two installments; while 80-85% of the amount will be paid within 24 hours, the remainder of the payment is made after collecting the dues from the customer. Some companies may even offer 100% of the invoice amount and may even allow for overdraft facility based on the finished stock of the company.

Since the bulk of the invoice dues are paid to you almost immediately, factoring is an effective way to minimize your wait for the receipt of payments.

How does Accounts Receivable Factoring work?

Advantages of Accounts Receivable Factoring.