ACCOUNTS RECIEVABLE FACTORING

Factoring companies typically have variable rates, meaning the longer it takes for your customers to pay an invoice, the more your factoring fee will be.  Factoring rates are also determined by the volume you will be factoring.

You submit an accounts receivable aging report and copies of the unpaid invoices to the factoring company.

The factoring companies generally provide an advance on the accounts receivable. The amount advanced can vary by industry but often exceeds 90%.

Next, your customer will pay the full value of the invoice(s) directly to the factoring company.

Finally, the factoring company will pay you the remaining balance, which is the difference between the initial advance and the total invoice amount, minus their fees.

Most businesses who invoice customers for work completed qualify for accounts receivable factoring. To qualify for accounts receivable factoring services, business owners must have well-established invoicing practices that clearly outline details such as sales, prices, and payment timelines. The invoices should only be for completed work, not for work that is still in progress. Additionally, customers must be other businesses or government agencies, not individual consumers.

The factoring company will evaluate your customers’ credit because they are the party responsible for payment of the invoice/accounts receivable. A business owner’s credit score is not a primary factor in determining eligibility for factoring services. This makes factoring an appealing option for businesses with credit challenges or startups with limited credit history.

Accounts receivable factoring involves selling unpaid invoices to a third party, while accounts receivable financing, or invoice financing, involves using unpaid invoices as collateral to secure a loan. In financing, business owners receive funds based on the value of their outstanding invoices or accounts receivable and then repay the lender, along with fees, after the invoices are collected. Because this is a type of business loan, the business will need to meet certain requirements to qualify, similar to a bank loan.

Factoring is more transactional based.  You submit individual invoices and receive an advance from the factoring company, and your customer sends payment to the factoring companyIn the case of non-recourse factoring, the company also bears the risk of non-payment if a customer fails to pay the invoice.

In contrast, with accounts receivable financing, business owners remain responsible for managing their invoices and collecting payments.

You will typically find accounts receivable factoring through companies that specialize in factoring, like Riviera Finance. Factoring companies may also specialize in certain geographies or industries, like construction or trucking. Factoring costs & service can vary significantly, so it’s recommended to find a factoring company that’s a good fit for your business. After approval, many factoring companies can provide funds within a matter of days.

Once you develop a relationship with a factoring company, you can return to them again and again. However, the factoring company will evaluate each of your customers for creditworthiness before deciding whether to factor those invoices.