Companies are constantly looking to improve the bottom line. Many top fortune 500 companies sell their accounts receivables to show cash on their statements. Medium and smaller sized businesses sell accounts receivable for cash to manage cash flow.
Accounts receivable funding or factoring is the sale of invoices at a discount. A method of financing that is used by businesses to raise capital quickly and improve cash flow without going into debt.
As your business sells a product or service to a customer, it creates an invoice. Usually, an invoice would itemize the unit sold, the price, and the terms of the sale. The invoice can either serve as a receipt if it acknowledges that payment has been received or as a bill if payment is due. An outstanding invoice may also be called an account receivable. Instead of waiting to collect payment, a business may elect to sell the invoice to a factor and receive an immediate cash advance. A factoring company is engaged in the buying of accounts receivable.
After receiving your invoices paid in full you will be charged a small “factoring fee” by the factoring company. Your customer will be notified of where to send their payments. The fee for the factored invoice will be deducted after payment is received from your customer. You do not have to factor all your invoices or change your billing process except for the payment address, and in some cases, the factor will have to submit the original invoices to your customer.
The factor will wait to collect from your customer. When the invoice is paid, the factor will retain a sum equal to initial cash advance plus applicable fees. The balance is then refunded to you along with any account statements. The exact factoring fee will depend on volume and time of payment.