Factoring is a method through which businesses can access immediate streams of cash. The idea of factoring takes a businesses outstanding accounts receivable invoices and sells them or uses them as collateral to receive a portion of the amount owed to the business as a short-term loan. Factoring has been around for many years, and many businesses use this type of financing on a regular basis. However, if a business is suffering because of outstanding accounts, and that business wants to use factoring to get the cash they need to stay afloat, there are some important accounts receivable financing tips that can help.
On the surface, factoring seems like a good idea, and it’s exactly that for many businesses. Some companies have extremely loyal customers that are slow to pay outstanding invoices. For these situations, when a customer has a reputation of being slow to pay, but they do end up paying, factoring is an excellent option. However, there are many fees associated with factoring that need to be taken into account.
The type of factoring will determine the amount of fees that are assessed. For example, recourse factoring is the most standard type of transaction. In this type of factoring, the factor pays roughly 90% of the outstanding accounts receivable. The remaining 10% is usually absorbed in the different fees that are assessed to the factoring transaction.
For non recourse factoring, the fees are typically going to be higher. This means the average payout for these accounts receivable is around 80% and, in some cases, closer to 70%. The reason for this is that with recourse factoring, if the owner of the invoice fails to pay, the factor can look to the business they loaned the money to for repayment. Non recourse factoring means that the factoring company can’t look for repayment from the business. In essence, the factoring company owns the invoice. Because of the cost for factoring insurance and collection services, less money is paid out on these types of factoring transactions.
While there’s plenty more that could be said about factoring, the important thing to understand is that there are fees involved in this transaction. Yes, it does offer immediate cash, which can be extremely helpful. However, by understanding the fees involved in factoring, a business owner will be better informed to determine if this type of cash infusion is right for them.