What is Factoring and How Does it Work?

by High Yield Savings Accounts

Is your business short on cash? Are you looking for a quick fix to handle your money problem? It may sound like a commercial, but AR factoring isn’t a gimmick.

AR factoring stands for accounts receivable factoring and it works to give your business a quick solution to low cash flow. As a business owner, or manager of finances, you know that cash is king. Having liquid assets and cash makes your business more flexible and dynamic.

To get started, your company will compile it’s invoices that haven’t been paid and sell them over to a factoring service for a lump sum. The factoring service will then take over your accounts receivable and your clients will pay them.

There are 3 institutions involved with factoring, your business, the customer, and the factor. If you decide that AR factoring is right for your business, the factor will work to determine a price they will pay you, which will be a fraction of the accounts receivable.

Accounts Receivable Factoring

There are two types of factoring loans available to you.

Recourse Factoring

This type of factoring is a bit more risky. After getting the factored loan, your business will still be responsible for any funds that are not collected by your factor. If your business is in a low-risk industry this still may be an option for you because the factor will charge you a cheaper rate for their services. If you are in a high-risk industry, however, you may want to consider non-recourse factoring.

Non-Recourse Factoring

If you operate in an industry that is difficult to retrieve accounts receivable, you will want to consider non-recourse factoring rates. This type of loan is where the factor assumes risk if they are unable to collect your A/R. This option is typically more expensive, meaning that you will not receive as favorable a rate from the factor, but it will give you a quick cash fix for your business.

If you are unsure which route is best for you, you will want to speak with a factor about their success with your type of business. Factors take in to consideration credit worthiness of your customers. Each factor may have different criterion for credit worthiness, so you should always speak with multiple vendors for the best rates. Also take in to consideration that these people will also be dealing with your customers, and collecting money from them, so never do business with a factor you don’t trust. Getting your business cash in hand is sometimes a difficult process, but working with a reputable factor can give your business the cash push it needs.


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