Accounts Receivable

Accounts Receivable Financing

Also known as “invoice factoring”, is when a company sells their receivables at a discount to a factoring company (“the factor”), who will then assume risk for the invoices. Usually businesses receive 70 – 90% of the total value depending on the age of each receivable. When engaging in a factoring loan, the company sells their right to full payment in exchange for immediate cash.

Pros – Fast cash, freed up working capital, time saved collecting on receivables, no collateral required, & retained ownership of the business.

Cons –  Fast-cash is appealing and can seal the deal for any business in a crunch, but make sure to consider the risks before signing a contract to factor your account receivables.

  1. Stigma When your business is factoring receivables, it can come as an indication to customers/partners that your business is cash poor. Your customers will be notified if you sell their invoice to a factoring company. For some customers it may reflect negatively on your business that you are selling their account (and information) to a third party rather than collecting on it yourself.
  2. Loss of control Once you sign on with a factoring company, they may have the power to tell you to stop doing business with a customer or organization.
  3. Cost They charge interest and fees on cash in advance. Look at the full picture of what you’re paying (not the month-to-month) before signing.
  4. Contract length Factoring contracts are usually about 2 to 3 years in length. Negotiate contract length.
  5. Rate based on clients if your business has slow-paying clients with poor credit, the factoring company may deem them unreliable and you will receive a lower percentage of cash up front.
  6. Factoring companies are not collection agencies – similar, but not the same… if one of your customers does not make good on their invoice, this will increase your fees to the factoring company.