Accounts Receivable Financing (Factoring)
Accounts receivable financing also known as factoring, is the purchase of accounts receivable at a discount. That is, a factor is a person or business that pays immediate cash (somewhat less than the invoices’ face value) for business receivables.
Typically, an unpaid invoice that will be paid by a financially strong company has great value. Factors pay cash for the right to receive the future payments on clients’ invoices to their customers.
Factoring is not a loan with interest due, but the sale of an asset for which a discount is paid.
How much does factoring cost and how does it work?
The amount a factor advances and the cost in discounts paid by a factoring client can vary widely and depend on
- the company’s industry
- the creditworthiness of the customers
- how long the customers take to pay
- the dollar volume of the factored invoices.
What can a business accomplish by factoring?
Cash from factored receivables allows the business owner to meet other regular business needs such as:
- meeting payroll
- paying taxes
- purchasing supplies
- funding marketing efforts
- taking advantage of discounts for paying with cash.
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