What is Accounts Receivable Factoring?

Cash flow problems often occur at the early stages of business development or during periods of rapid growth. Cash flow especially becomes a problem in industries where it’s typical for completed work to go unpaid for 30, 60, or even 90 days after issuing the invoice. Thus, when growing companies start experiencing growth pains, they first try to apply for small business loans.

However, conventional borrowing increases business expenses and normally requires additional collateral. Some companies—especially smaller ones—are turned down by banks because of loan underwriting criteria. Some companies will also explore the option of equity financing, but this form of funding is generally harder to find than debt financing. And once found, it takes longer to arrange.

Accounts receivable factoring, on the other hand, is a viable funding option for companies experiencing cash flow challenges. In a nutshell, factoring is the process of converting the accounts receivable of a business into cash by selling outstanding invoices to a 'factor' for a discount.

With factoring, instead of depending on the applicant's financial statements, the factoring company focuses on the strength of the client's accounts receivable. In other words, because factoring companies are paid by the applicant’s customers (account debtors), factors are most concerned with the creditworthiness of the applicant’s customers. If the applicant’s company has a product or service that it provides to a creditworthy customer, then the business is a good candidate for invoice factoring.

It’s important to note that invoice funding does not create debt or require additional collateral. It is very simple to use. What could take weeks or months to be approved for funding from a more traditional lender, takes 3-5 business days in the world of factoring. Cash advances from 80% of the invoiced amount, depending on the customers and the business volume, can normally be obtained in 24 hours or less on an ongoing basis. In addition, funding occurs as long as a business has outstanding invoices and needs more cash, and as long as the business is selling to credit-worthy account debtors.

Maintaining a healthy cash flow via accounts receivable factoring provides a growing business with the working capital it needs to pay salaries, reduce debt, improve vendor relations and focus on critical success factors—operations, sales and growth.