Accounts Receivable Factoring Explained

Invoice Factoring Group

Accounts receivable financing is a type of funding that is used by companies who have cash flow problems because their clients pay their invoices slowly. A receivables factoring facility finances you open invoices, which improves your working capital enabling you to operate your business and minimizing cash flow problems. This article covers detailed information about how a facility works and is setup. If you need basic information, please read what is accounts receivable factoring before reading this article.

Setting up an account

The process of setting an account starts when you submit an application to a finance company. Assuming you are a good candidate for this type of financing, the process is fairly straight forward. You submit an application, along with some additional information about your company. One of the most important pieces of information that you can provide will be an accounts receivable aging report, which shows your client list and outstanding A/R. The finance company will use this information as part of their due diligence process,to determine what terms to give you and to ensure that that you are a good candidate for funding. If everything goes well, your account will be approved and set up.

However, before funding your account, your factor will need to send a notice of assignment to each of the customers that you want to finance. This document is fairly standard in the industry and is used to advice your client of the new payment address, among other things. Once this is done, the account is ready for funding.

Transaction structure

Most transactions are structured using a two installment payment model. Basically, the accounts receivable factoring company buys your invoices in two installments called the advance and the rebate. Usually, the advance covers about 85% of the gross value of the invoice and is wired to your account when you invoice your client. The rebate covers the remaining 15%, less the cost, once your client pays.

One important detail of this solution is that most invoices are verified prior to funding. This ensures that the invoice is accurate and payable when due. Most companies and customers develop processes to handle this part of the transaction as quickly and effectively as possible. Most accounts operate as follows:

  1. You complete the work
  2. You submit the invoices using a special schedule of accounts document
  3. A sample, or all, of your invoices are verified
  4. The company advances 85% of the A/R by wire or ACH transfer
  5. After 30 to 60 days, your clients pay
  6. The company rebates the remaining 15%, less cost of funding

A word about costs

Most finance companies use a similar model to assess costs. Generally, the cost is based on a percentage of your invoice and increases the longer the invoice remains unpaid. Examples of this structure include 1% per 10 days model or 1.5% for 30 days.

The actual discount will be based on the credit quality of your clients, the size of your portfolio and how long it takes to pay. However, both terms and rates are negotiable based on the above criteria, especially if you have a well run business.

Rates as low as 1.5% Advances as high as 85% for qualified clients
Get an online receivables factoring quote or call (866) 730 1922


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