Your Guide To Accounts Receivable Factoring

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Do you have unpaid invoices that have been sitting on your books for some time? Accounts receivable factoring could be worth considering if you desperately need to get paid to keep operations afloat. It involves selling your invoices to get a portion of what you’re owed now instead of waiting to receive payment.

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What Is Accounts Receivable Factoring?

Accounts receivable factoring offers an effective solution for businesses looking to avoid cash flow problems. Generally, you can sell your invoices to accounts receivable factoring companies for between 50 percent and 90 percent of their worth. The factoring company will collect what’s owed on your behalf and remit payment to you for the reminder of what’s owed, minus any applicable fees. 

To illustrate, assume you have an invoice for $150,000 payable in 60 days. A factoring company agrees to purchase it for you for 80 percent of what it’s worth, which means you’ll get $120,000 right away. However, the remaining $30,000 will stay with the factoring company until the invoice is paid. 

The amount of time it takes the customer to pay will determine how much of the remaining balance you get back. For example, if the factoring company charges a processing fee of 3 percent, the amount will automatically be reduced to $25,500 ($30,000 – $4,500).

You’ll also pay a factoring fee of around 1 percent per week that the invoice remains outstanding. If the customer takes four weeks to pay, you’ll be on the hook for a factoring fee of $6,000 ($150,000 * 4 percent), bringing the amount you’ll receive to $19,500. 

Two Types Of AR Factoring

There are two types of accounts receivable factoring to be mindful of – recourse factoring and non-recourse factoring.

What Is Recourse Factoring?

Recourse factoring is relatively risky. If the customer does not pay the outstanding invoice, the factoring company could ask that you repurchase the invoice. It depends on the terms and conditions of the original agreement. 

What Is Non-Recourse Factoring?

Non-recourse factoring means that the factoring company assumes total liability for the invoice. So, if the customer does not pay, you won’t be obligated to buy the invoice back.

Accounts Receivable Factoring vs. AR Financing

Although the terms are often used interchangeably, accounts receivable factoring and accounts receivable financing aren’t quite the same. With accounts receiving financing, the business owner gets a loan for the value of the invoices, pursues payments from the customer and pays the lender back directly with interest and fees. Generally, this form of financing is less costly since the collection responsibilities remain with the business owner and not the factoring company. 

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Advantages Of Accounts Receivable Factoring

Fast Access To Cash

Some factoring companies will pay you cash for your invoices in just one business day. But when you apply for a traditional business loan, it could take several days or weeks to get approved and receive the funding you need to cover payroll, order inventory, capitalize on a lucrative business opportunity or any costs you didn’t anticipate. 

Easier Qualifications

The application process for traditional business loans can be overwhelming. You’ll likely need to provide a ton of documentation, and the lender will evaluate your creditworthiness to determine if you’re a good fit for the loan. Unfortunately, being in business for a brief period or having a low credit score due to past financial challenges means you could be denied a loan. 

However, you could get approved for invoice factoring even if you haven’t been in business for an extended period or have less than perfect credit. 

Can Help In Downturn

If you experience a downturn in your business due to market conditions or circumstances beyond your control, accounts receivable financing could be a viable option to infuse capital into your business. But with a traditional bank or credit union, you could get declined for a small business loan, especially if you don’t have good or excellent credit or the lender is concerned about the projected outlet of the industry you’re in. 

No Extra Collateral Required

Your invoices serve as collateral when you factor in receivables. However, many business loans are secured by your assets, including inventory, machinery or equipment. Therefore, they could be at risk if you fall behind on payments. 

Disadvantages Of Accounts Receivable Factoring

Higher Fees

Although the application process is streamlined and you could get fast funding, accounts receivable factoring is relatively pricey. And if it takes several weeks or months for the factoring company to collect, you could be assessed even heftier fees. 

Sharing Your Future Profits

When you enter into an invoice factoring agreement, you’ll fork over a percentage of the future profits to the factoring company. As mentioned earlier, you’ll pay a flat processing fee and a factoring fee that’s determined by the amount of time it takes to collect on the invoice. 

FAQs About Accounts Receivables

Is Factoring Receivables A Good Idea?

Accounts receivable factoring can effectively resolve cash flow issues and access the capital you need to keep operations running smoothly. Plus, you won’t have to chase customers to collect unpaid invoices. However, it’s vital to weigh the benefits and drawbacks to determine if it’s a smart financial move for your business. 

How Does AR Factoring Affect The Balance Sheet?

Invoice factoring does not affect your company’s financial statements. So you won’t have to add it as a debt to your balance sheet. 

How Long Does It Take To Get Cash From AR Factoring?

It depends on the factoring company. However, some offer funding in as little as one business day. 

How Much Does Accounts Receivable Factoring Cost?

Most factoring companies charge a processing fee of around 3 percent of the total outstanding invoice. You’ll also typically pay a factoring fee for each week that the invoice remains unpaid, but the amount depends on the factoring company and the terms of the agreement. 

If you’re interested in getting cash for your unpaid invoices, consider Lendio as they partner with lenders that offer low factor rates. Plus, you could receive funding for up to 90 percent of your receivables within 24 hours, even if you don’t have perfect credit. 

Visit Lendio’s website today to learn more about accounts receivable financing and get the funding you need for your business. 

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