What is AR Factoring?
Accounts receivable financing (also known as factoring) has been around for a very long time. In fact, it was something even the early explorers used to help finance their voyages across the world. Because it’s one of the oldest financing methods out there, there’s proof that it’s been effective in helping businesses and entrepreneurs get their ventures off the ground.
How does AR Factoring Work?
Accounts receivable financing operates similarly to a loan but is, in fact, a sale of an asset. Businesses that send out invoices have these receivables as assets. When they finance them, they are taking the receivables to a factor who then takes on the responsibility of collecting on the invoice. In return, you get an upfront payment for the invoice, typically adding up to around 80%-100% of the total amount of receivable.
You may pay weekly fees while the invoice is yet to be paid or take a balance at the end (minus the fees for the factor). This method of financing is much more flexible and quicker to approve than that of a conventional business loan. You don’t have to offer any additional collateral or down payments, since the receivable itself is the collateral. Also, most factoring companies don’t expect you to have perfect credit. While credit rating is important, it’s not weighed quite as heavily as it is in a banking institution.
Most factoring companies are more interested in the quality of the receivable. That is, who your customer base is, what their track record of payment is and the age of the invoice itself. You may also find factoring companies that specialize in working in industries like yours. When you go to look for an accounts receivable financing company, first try and find any that are familiar with your line of work.
How Do You Sell Your Receivable?
Once you’ve found your factoring company, you can expect to sell the receivable at a discount of 2-5%. Your terms for the arrangement will include factors such as the # of invoices that are being sold to them, the money amount of the invoices, the average number of days until payment and also the track record of payment from your clients.
You can sell a single invoice or multiples, but be aware that most factoring companies don’t want to take on invoices from companies that have a history of being slow to pay. Instead, they’ll prioritize those that are usually paid on time.