What is Factoring (Accounts Receivable Finance)
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What Is Factoring?
Common questions and answers about factoring (also known as "accounts receivable financing").
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Factoring Overview
Factoring is a transaction in which a business sells its accounts receivable, or invoices, to a third party commercial financial company, also known as a “factor.” This is
done so that the business can receive cash more quickly than it would by waiting 30 to 60 days for a customer payment. Factoring is sometimes called “accounts
receivable financing.”
The terms and nature of factoring can differ among various industries and financial services providers. Most factoring companies will purchase your invoices and advance
you money within 24 hours. The advance rate can range from 80% to as much as 95% depending on the industry, your customers’ credit histories and other criteria. The
factor also provides you backoffice support. Once it collects from your customers, the factor pays you the reserve balances of the invoices, minus a fee for assuming the
collection risk. The benefit of factoring is that, instead of waiting one to two months for a customer payment, you now have that cash in hand to operate and grow your
business.
Factoring is not a loan. No debt is assumed by factoring. The funds are unrestricted, providing a company more flexibility than with a traditional bank loan.
Factoring in Five Simple Steps
1. You perform a service for your customer.
2. You send your invoice to a factoring company.
3. You receive a cash advance on your invoice from the factoring company.
4. The factoring company collects full payment from your customer.
5. The factoring company pays you the rest of your invoice amount, minus a fee.
Contact Us About Factoring
Our experienced service representatives are waiting to answer your questions.
Call (877) 2424390 to Speak with a Representative
What are the Advantages of Factoring?
There are several reasons why factoring is a valuable financial tool for many businesses. The key benefit is that factoring provides a quick boost to your cash flow. Many
factoring companies provide cash on your accounts receivable within 24 hours. This can solve shortterm cash flow issues and help fuel the growth of your business.
Factoring companies handle your customer collections, and may also evaluate your customers’ credit and payment histories.
Some other major benefits include:
Factoring can be customized and managed so that it provides necessary capital when your company needs it.
The financing does not show up on your balance sheet as debt.
Factoring is based on the quality of your customers’ credit, not your own credit or business history.
Factoring provides a line of credit based on sales, not your company’s net worth.
Unlike a conventional loan, factoring has no limit to the amount of financing.
Factoring aligns well with startup businesses that need immediate cash flow.
Is Factoring Something New?
No, it actually goes back several centuries. The origin of factoring lies in overseas trade among nations. It became a part of doing business in England as early as the
1400s, and came to America with the Pilgrims in 1620. Like all financial tools, factoring has evolved over the years. It grew in the United States as an effective way for
companies to build more cash flow, due to limitations companies faced securing loans in the nation’s fragmented banking system.
Who Factors?
Companies of all sizes, from oneperson businesses to Fortune 500 corporations, use factoring as a way to increase their cash flow. Factoring spans all industries,
including trucking, transportation, manufacturing and distribution, textiles, oil and gas, and staffing agencies. Companies use the cash generated from factoring to pay for
inventory, buy new equipment, add employees, expand operations—basically any expenses related to their business. Factoring allows a company to make quicker
decisions and expand at a faster pace.
Factoring Illustrated
The factoring process explained in five illustrated steps.
How Factoring Works
Here’s a fictional example to illustrate a common factoring situation:
ABC Transport is a trucking company that wants to double the size of its fleet over the next two years and serve more clients in the West. The company has just landed a
new customer on the West Coast who needs freight shipped from Kansas City to Los Angeles. The customer will pay for the service within 30 days, but that won’t cover
the immediate fuel, payroll and maintenance costs of running the route. The owners of ABC Transport have been in this situation before. They feel that the lack of
available cash flow has prevented the company from taking on new business.
ABC Transport turns to a factoring company, selling the West Coast customer’s invoice in exchange for a 90 percent advance on the total amount within a day. The
influx of cash replenishes the trucking company’s reserves, allowing it to run the Kansas CityLos Angeles route. Factoring also gives ABC Transport the flexibility to
take on new customers as well.
How Much Do I Need to Factor?
It depends on your company’s unique business needs. Some companies factor all of their invoices, while others factor only invoices for customers that take a longer time
to pay. The volume of receivables that a company may factor can range from a few thousand dollars to millions of dollars a month.
Factoring versus a Traditional Bank Loan
Factoring, or “accounts receivable financing,” is a quick, flexible way for businesses to build up their cash flow. Here is how factoring
differs from a bank business loan or line of credit:
Factoring
Bank Loan
The amount of money you can finance grows as your receivables grow.
The money you borrow comes with a cap or a limit.
Factoring is not a loan. You assume no debt.
You repay principal and interest on your loan.
You can qualify for factoring regardless of your credit score; most factors are more concerned with your customers’ credit strength.
Qualifying for a loan requires a review of your company’s financials, assets and liabilities, and credit history.
It can take less than five days to set up an account.
Securing a loan or line of credit takes between one and two months.
Minimal paperwork and documentation are required to start factoring.
Once your loan is approved, you have immediate access to those funds.
Minimal paperwork and documentation are required to start factoring.
Extensive paperwork, financial statements and personal information are required.
Some factors handle collections of your accounts receivable and provide additional back office services.
No accounts receivable or back office services are provided.
Rates can be adjusted as you finance more money through factoring.
Your annual percentage rate is locked longterm, or for the life of the loan.
Some factors provide credit reports and other information on your existing and potential customers.
No credit services provided, which means you manage your own credit policy.
What is the Difference Between Recourse and NonRecourse Factoring?
What is the Difference Between Recourse and NonRecourse Factoring?
Recourse means the client ultimately takes the responsibility for the payment of the invoice.
Nonrecourse factoring allows companies to sell their invoices to the factoring company, which assumes all of the credit risks for the collection of the invoice. Some
factoring companies offer both recourse and nonrecourse factoring.
What about Fees or Contract Terms?
Different factoring companies have different fee structures. Some only charge an overall factoring fee that is determined by monthly volume and the creditworthiness of
your customers. Other factoring companies have additional fees that cover money transfers, shipping, collateral and other costs of doing business. Make sure the factoring
company you work with is upfront and transparent about the fees it charges. Most factoring contracts also have an annual renewal term.
Is Credit Insurance Needed on Debtors?
Insurance is not typically necessary, but may be required in specific circumstances.
For more information on factoring, read our free resource, “Your Complete Guide to Factoring.”
Contact Us About Factoring
Our experienced service representatives are waiting to answer your questions.
More Articles in this Guide
What Is Factoring?
The Six Most Common Myths about Factoring
A Brief History of Factoring (Accounts Receivable Financing)
When To Start Factoring
The Difference between Recourse and NonRecourse Factoring
Important Questions to Ask a Factoring Company
How Factoring Can Help Your Company Grow
A Tale of Two Companies, and How Both Benefited from Factoring
Contact Us Today!
Contact a representative at (877) 2424390
Request Information
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What is Factoring?
Factoring Guide
Get Paid Faster Guide
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Contact
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Factoring Services
Fuel Discount Program
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About Us
Insights
Contact Us
Customer Center
Factoring
What Is Factoring?
Common questions and answers about factoring (also known as "accounts receivable financing").
Share
Tweet
Share
Share
Factoring Overview
Factoring is a transaction in which a business sells its accounts receivable, or invoices, to a third party commercial financial company, also known as a “factor.” This is
done so that the business can receive cash more quickly than it would by waiting 30 to 60 days for a customer payment. Factoring is sometimes called “accounts
receivable financing.”
The terms and nature of factoring can differ among various industries and financial services providers. Most factoring companies will purchase your invoices and advance
you money within 24 hours. The advance rate can range from 80% to as much as 95% depending on the industry, your customers’ credit histories and other criteria. The
factor also provides you backoffice support. Once it collects from your customers, the factor pays you the reserve balances of the invoices, minus a fee for assuming the
collection risk. The benefit of factoring is that, instead of waiting one to two months for a customer payment, you now have that cash in hand to operate and grow your
business.
Factoring is not a loan. No debt is assumed by factoring. The funds are unrestricted, providing a company more flexibility than with a traditional bank loan.
Factoring in Five Simple Steps
1. You perform a service for your customer.
2. You send your invoice to a factoring company.
3. You receive a cash advance on your invoice from the factoring company.
4. The factoring company collects full payment from your customer.
5. The factoring company pays you the rest of your invoice amount, minus a fee.
Contact Us About Factoring
Our experienced service representatives are waiting to answer your questions.
Call (877) 2424390 to Speak with a Representative
What are the Advantages of Factoring?
There are several reasons why factoring is a valuable financial tool for many businesses. The key benefit is that factoring provides a quick boost to your cash flow. Many
factoring companies provide cash on your accounts receivable within 24 hours. This can solve shortterm cash flow issues and help fuel the growth of your business.
Factoring companies handle your customer collections, and may also evaluate your customers’ credit and payment histories.
Some other major benefits include:
Factoring can be customized and managed so that it provides necessary capital when your company needs it.
The financing does not show up on your balance sheet as debt.
Factoring is based on the quality of your customers’ credit, not your own credit or business history.
Factoring provides a line of credit based on sales, not your company’s net worth.
Unlike a conventional loan, factoring has no limit to the amount of financing.
Factoring aligns well with startup businesses that need immediate cash flow.
Is Factoring Something New?
No, it actually goes back several centuries. The origin of factoring lies in overseas trade among nations. It became a part of doing business in England as early as the
1400s, and came to America with the Pilgrims in 1620. Like all financial tools, factoring has evolved over the years. It grew in the United States as an effective way for
companies to build more cash flow, due to limitations companies faced securing loans in the nation’s fragmented banking system.
Who Factors?
Companies of all sizes, from oneperson businesses to Fortune 500 corporations, use factoring as a way to increase their cash flow. Factoring spans all industries,
including trucking, transportation, manufacturing and distribution, textiles, oil and gas, and staffing agencies. Companies use the cash generated from factoring to pay for
inventory, buy new equipment, add employees, expand operations—basically any expenses related to their business. Factoring allows a company to make quicker
decisions and expand at a faster pace.
Factoring Illustrated
The factoring process explained in five illustrated steps.
How Factoring Works
Here’s a fictional example to illustrate a common factoring situation:
ABC Transport is a trucking company that wants to double the size of its fleet over the next two years and serve more clients in the West. The company has just landed a
new customer on the West Coast who needs freight shipped from Kansas City to Los Angeles. The customer will pay for the service within 30 days, but that won’t cover
the immediate fuel, payroll and maintenance costs of running the route. The owners of ABC Transport have been in this situation before. They feel that the lack of
available cash flow has prevented the company from taking on new business.
ABC Transport turns to a factoring company, selling the West Coast customer’s invoice in exchange for a 90 percent advance on the total amount within a day. The
influx of cash replenishes the trucking company’s reserves, allowing it to run the Kansas CityLos Angeles route. Factoring also gives ABC Transport the flexibility to
take on new customers as well.
How Much Do I Need to Factor?
It depends on your company’s unique business needs. Some companies factor all of their invoices, while others factor only invoices for customers that take a longer time
to pay. The volume of receivables that a company may factor can range from a few thousand dollars to millions of dollars a month.
Factoring versus a Traditional Bank Loan
Factoring, or “accounts receivable financing,” is a quick, flexible way for businesses to build up their cash flow. Here is how factoring
differs from a bank business loan or line of credit:
Factoring
Bank Loan
The amount of money you can finance grows as your receivables grow.
The money you borrow comes with a cap or a limit.
Factoring is not a loan. You assume no debt.
You repay principal and interest on your loan.
You can qualify for factoring regardless of your credit score; most factors are more concerned with your customers’ credit strength.
Qualifying for a loan requires a review of your company’s financials, assets and liabilities, and credit history.
It can take less than five days to set up an account.
Securing a loan or line of credit takes between one and two months.
Minimal paperwork and documentation are required to start factoring.
Once your loan is approved, you have immediate access to those funds.
Minimal paperwork and documentation are required to start factoring.
Extensive paperwork, financial statements and personal information are required.
Some factors handle collections of your accounts receivable and provide additional back office services.
No accounts receivable or back office services are provided.
Rates can be adjusted as you finance more money through factoring.
Your annual percentage rate is locked longterm, or for the life of the loan.
Some factors provide credit reports and other information on your existing and potential customers.
No credit services provided, which means you manage your own credit policy.
What is the Difference Between Recourse and NonRecourse Factoring?
What is the Difference Between Recourse and NonRecourse Factoring?
Recourse means the client ultimately takes the responsibility for the payment of the invoice.
Nonrecourse factoring allows companies to sell their invoices to the factoring company, which assumes all of the credit risks for the collection of the invoice. Some
factoring companies offer both recourse and nonrecourse factoring.
What about Fees or Contract Terms?
Different factoring companies have different fee structures. Some only charge an overall factoring fee that is determined by monthly volume and the creditworthiness of
your customers. Other factoring companies have additional fees that cover money transfers, shipping, collateral and other costs of doing business. Make sure the factoring
company you work with is upfront and transparent about the fees it charges. Most factoring contracts also have an annual renewal term.
Is Credit Insurance Needed on Debtors?
Insurance is not typically necessary, but may be required in specific circumstances.
For more information on factoring, read our free resource, “Your Complete Guide to Factoring.”
Contact Us About Factoring
Our experienced service representatives are waiting to answer your questions.
More Articles in this Guide
What Is Factoring?
The Six Most Common Myths about Factoring
A Brief History of Factoring (Accounts Receivable Financing)
When To Start Factoring
The Difference between Recourse and NonRecourse Factoring
Important Questions to Ask a Factoring Company
How Factoring Can Help Your Company Grow
A Tale of Two Companies, and How Both Benefited from Factoring
Contact Us Today!
Contact a representative at (877) 2424390
Request Information
About
Customer Center
Agent Program
Careers
Insights
Factoring Services
Fuel Card
CarrierPro
Contact Us
©2015 RTS Financial Service, Inc. All rights reserved.
Privacy Policy
Terms of Use
