Accounts Receivable Factoring When Your Business Needs Quick Cash

Accounts receivable factoring is a great way for your business to get quick cash. Cash that can be used in an emergency, equipment replacement, or for quick growth. If your business sees a need to grow very fast but the bank won't lend you the money, factoring is the best route to take. It can get you the cash you need sometimes in as fast as 24 hours.

The idea of accounts receivable factoring is pretty simple. A company, called a factor, buys all or some of your accounts receivable invoices from you and pays you a percentage of what they're worth. The percentage is usually between 70-90%, and most companies will offer upwards of 97% if you are planning on factoring for multiple months. Other factor companies can act as a collection agency for you to get payment on troubled accounts. The factor company assumes the risk of the invoices that your company sells to them.

Let's look a little deeper at accounts receivable factoring.

Accounts receivable factoring allows you get quick cash for your outstanding invoices.  Image courtesy of MiguelB via Flickr.
Accounts receivable factoring allows you get quick cash for your outstanding invoices. Image courtesy of MiguelB via Flickr.

When to use Accounts Receivable Factoring

Accounts receivable factoring is a helpful tool to get your company through a tough financial time. Restaurants that have seasonal swings often have trouble making it through the slow months, so factoring would be a good resource for cash. If an upswing in sales can be predicted factoring is an even better option.

A business with poor credit also benefits from factoring since credit checks usually aren't involved with the transaction. The factor is paying you based on future income, rather than your past credit history. Many companies use factoring as a last resort for cash.

The best time to use accounts receivable factoring is when your business needs money fast to take advantage of a new opportunity. Money will be delivered much faster than a bank can approve a loan, and incredibly faster than waiting for outstanding invoices to be paid.

The Risks Of Factoring

Invoice factoring may seem like a great idea for getting cash for your business, but it has it's drawbacks. Keep in mind that factors aren't regulated like banks are. They all operate with different terms and conditions and using the wrong one can prove very costly. Spend a good amount of time doing research on each company online to see what each offers and charges. As I said above, the payment is usually between 70-90% and they add a few of their own fees into the mix as well. A few hours of research can earn you 10% or 15% extra cash by finding the right company.

Long term factoring is also an option that most factors offer. Obviously, if this the only way your company can get the money it needs, do it. Pay attention to the recurring monthly factoring fee. It's usually around 5% and over the course of a year, you will end up paying significantly more than you normally would in bank interest.

If you need to free up the capital tied in your inventory fast, factoring is the way to go.  Be sure to heavily weight its pros and cons before signing up.


Transportation Collection Agency 6 years ago

This is a great way to expand your business quickly. Great post.

Invoice Factoring Expert 5 years ago

This is a great post and clearly lays out the fundamentals of Invoice factoring. I've read too many Factoring articles where the author either didn't clearly understand what Invoice factoring was, or it was written by someone in the industry that had too much of a slant one way or the other. This is a great balanced article that clearly explains what Invoice factoring is. Great job!

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