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Accounts Receivable Factoring: What is Factoring Receivables?

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Factoring receivables helps businesses get funding by selling unpaid invoices for a cash advance to a factoring company. You’ll get cash quickly, but this type of funding can be expensive, since a factoring company takes a big bite. Let’s take a deep dive into how accounts receivable factoring works so you can decide if it’s right for your business.

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What is accounts receivable factoring?

Factoring receivables, also known as invoice factoring or accounts receivable factoring, is a funding method that allows businesses to convert unpaid invoices into cash. You would sell your unpaid invoices to a third-party factoring company, who pays you a percentage of that invoice as an advance and then your customer pays the factoring company. This type of funding is best for businesses that have a steady stream of invoices, but may struggle getting customers to pay promptly.

Since this type of financing gets expensive, it’s best for plugging short-term cash-flow gaps.

How factoring receivables works

With factoring receivables, a factoring company purchases your unpaid invoices and pays you a portion of the invoice value upfront. This amount is called the advance rate. The advance rate varies depending on the company, but generally ranges from 75% to 100% — or the full invoice amount — minus fees.

When you use accounts receivable factoring, your clients usually settle their invoices through the factoring company, so this means that they may be aware that your business is experiencing cash-flow issues. The factoring company will take a cut — called their factoring fee — before paying you the rest of what you’re owed. The factoring fee will be charged at regular intervals until your clients pay their invoices. Rates may be calculated based on the face value of the invoice or the amount of the cash advance. Rates typically range anywhere from 1% to 6%.

Types of factoring receivables

Here’s a look at the different types of factoring receivables and how they work.

Recourse vs. non-recourse factoring

With recourse factoring, you’ll be held responsible if your clients fail to pay the factoring company. This type of factoring often requires a personal guarantee, but may come with lower fees and higher cash advances. The factoring company takes on more risk with non-recourse factoring, so rates tend to be higher — and advance rates may be lower.

Spot vs. regular factoring

Regular factoring usually involves selling a batch of unpaid invoices all at once. Spot factoring is when a business sells a single outstanding invoice. It’s a one-off transaction that’s usually reserved for a sizable invoice. This approach might be more expensive than regular factoring.

Notification vs. non-notification factoring

With traditional invoice factoring, also known as notification factoring, the business’s clients are made aware that their invoice has been sold to an accounts receivable factoring company. Non-notification factoring is confidential. Clients continue making payments to the business just as before, but the factoring company is actually the one handling the transactions.

How much does accounts receivables factoring cost?

Let’s use the example below to illustrate the cost of factoring receivables. Say you’re a small business owner with $100,000 in outstanding invoices due in the next 30 days, but you need that cash now to cover some of your operational expenses.

To get access to that money sooner, you work with a factoring company. You’ll sell the invoices to your factoring company, which offers an 80% advance rate with a 3% factoring fee. Within a day or so, they’ll send you $80,000 to use in your business.

Invoice amount$100,000 due in the next 30 days
Advance rate80% (the business will receive an $80,000 cash advance)
Factoring fee3% of invoice value charged monthly
Total cost of factoring
  • $3,000 if invoice is paid on time
  • $6,000 if invoice is paid one month late
  • $9,000 if invoice is paid two months late and so on

Once your customers pay the invoices to the factoring company, the factoring company will release the remaining reserve to you, minus their factoring fee. If it takes the full 30 days for your customers to pay and you’re charged a 3% monthly factoring fee, you’ll get back $20,000 minus the $3,000 factoring fee, or $17,000.

If the customer doesn’t pay in 30 days, you’d need to continue paying the factoring fee until they do pay. This is why factoring receivables could end up getting much more expensive. If the invoice is never paid and you’ve agreed to recourse factoring, the invoice will be sold back to your business.

How to qualify for factoring receivables

Every accounts receivable factoring company is different, but here’s a look at common eligibility requirements:

  • Accounts receivable history: Your business will probably need to demonstrate well-established invoicing practices and have a steady stream of completed invoices. This means that you’ll likely need to be in business for a little bit, though a startup business might be able to qualify if you have enough invoicing history.
  • Creditworthiness: Your clients’ creditworthiness will likely be more important than your personal credit or business credit. Most factoring companies want to see a positive payment history from your clients to feel confident that they’ll continue paying their outstanding invoices.
  • Strong profit margins: Factoring companies want reassurance that your business is capable of keeping up with client demand.
  • Commercial or government clients: Consumer-facing businesses typically don’t qualify for accounts receivable factoring.

Factoring companies may require you to provide the following documents:

  • Personal identification
  • Your application from the factoring company
  • Copy of your business’s articles of incorporation and tax ID number
  • The invoices you want to factor
  • Your accounts receivable history and current status

Pros and cons of accounts receivable factoring

ProsCons

  Good for business owners with poor credit: Most factoring companies will be more concerned with your clients’ payment history than your personal credit. If you’re unable to qualify for traditional business loans, factoring could be a viable alternative.

  Fast funding: Many factoring companies allow you to apply online. If approved, you could receive funding within hours.

  Open to startups and young companies: Time in business isn’t as important, so long as you have a track record of invoices.

  Can be expensive: Depending on the structure and fees, factoring receivables can add up quickly if your clients pay their invoices late (or not at all).

  It might damage your reputation: If your clients are notified of a factoring arrangement, it might make them wonder if your business is financially struggling.

  It could be a temporary fix: If your cash flow needs stem from low revenue or significant operating expenses, continuous invoice factoring might not be sustainable.

Accounts receivable factoring vs. accounts receivable financing

Although factoring receivables sounds similar to accounts receivable financing, the two aren’t the same thing.

Both funding options leverage outstanding invoices, but in different ways. With accounts receivable financing, you’re using unpaid invoices as collateral to secure a loan or line of credit. In other words, accounts receivable financing uses unpaid invoices to secure another source of funding. By contrast, with factoring receivables or accounts receivable factoring, you’re getting a cash advance on your unpaid invoices.

Accounts receivable financing typically requires strong credit, which can be a stumbling block for some business owners — but it’s usually less expensive than invoice factoring. However factoring might provide faster funding.

Accounts receivable factoring vs. business line of credit

Similar to a business line of credit, factoring receivables gives your business access to a credit line, too. However, accounts receivable factoring works a little differently.

Interest rates

With a business line of credit, you’ll only be charged interest on the amount you borrow. Interest rates typically range anywhere from 3% to over 29%. As the example above showed, factoring receivables charge a monthly fee based on the total invoice value. This type of borrowing cost may become fairly expensive if your clients don’t pay their invoices right away.

Term length

Terms for factoring receivables tend to be short because they reflect the payment terms of your invoices. If your clients are expected to pay within 30 days, that’s a pretty quick turnaround. Terms for business lines of credit vary but may last anywhere from 12 weeks to 18 months, while some lines of credit may even be open-ended, renewing annually.

Advance rate

With business lines of credit, borrowers are given a credit limit and can borrow up to that amount. Accounts receivable factoring offers an advance rate, which reflects the percentage of invoice value that the factoring company is willing to float you up front.

What are some factoring receivables companies?

Here are some accounts receivable factoring companies to consider:

FundThrough

Funding is generally available the day after your invoices are verified. Fees range anywhere from 2.75% to 8.25%, depending on the invoice terms. Your business must have at least $100,000 in outstanding invoices.

altLINE

altLINE works with a wide variety of industries. Factoring fees are as low as $350, with cash advance rates ranging from 75% to 90%. Loan amounts range from $30,000 to $5,000,000.

Triumph Business Capital

Triumph Business Capital specializes in invoice factoring for the trucking industry. Its website doesn’t clarify its cash advance rates or factoring fees, but does say that applications are typically processed within 24 hours.

Riviera Finance

Available to startups as well as established companies, Riviera Finance provides funding within 24 hours after invoices are verified. It offers non-recourse factoring and cash advance amounts up to 95% of the invoiced amount.

eCapital

eCapital doesn’t clearly disclose its rate structure, but does offer free quotes for factoring receivables. You should be contacted within 24 hours after reaching out. eCapital allows for invoices with up to 90-day payment terms, and businesses can get paid the same day they submit an invoice.

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