What Is Accounts Receivable Factoring?

Last Updated: Friday, February 10, 2012

Accounts receivable factoring has been around for years but numerous small company owners are hesitant to approach factoring organizations for assistance because of the lack of details. Factoring is a legal way of getting funds from account receivables. What it indicates is that a company owner can borrow money against their invoice sales. Factoring is alternatively called cash flow financing or invoice financing.

Factoring is essential if the organization desires to get funding without having to wait for up to 90 days from their debtor or debtors to get the full payment. Factoring businesses will present funding up to 90% of the invoice sales so that the company owner can get working capital for their business.

What factoring firms do is to get the organization owner's sales invoice at a discounted price. They will be the ones to assume the risk of collecting payment from the debtor. They will do the credit check not on the enterprise owner but on the debtor. They will also administer all of the invoice sales. Factoring businesses typically notify the debtor or debtors that the payment will be collected by them.
There are numerous types of factoring companies. Often factoring is used interchangeably with invoice discounting. There is a slight difference though. Factoring organizations will purchase sales invoices at a discounted cost. Invoice discounting is when an organization owner approaches one of the
kinds of factoring company:


Standard Factoring

Standard Factoring businesses can provide funding up to 90% of the invoice sales. They are required to disclose to the debtor that the payment is going to be made to them and no longer to the company owner. Factoring firms can operate in niches. There are factoring businesses that operate within the healthcare industry specifically, as it is normal practice in the healthcare business to take up to 90 days for full payment of services or goods.


Partnership Factoring

These organizations can present funding up to 90% of the enterprise invoice sales. It's called a partnership simply because collection from the debtor will be carried out by both the organization owner and the factoring organization. Full disclosure is necessary.

 
Confidential Factoring

The debtor does not know that the client has asked for help from a factoring organization. The enterprise owner will continue to collect the payment from the debtor like he would regularly. Funding from confidential factoring can reach up to 85%. Confidential factoring is useful to avoid the debtor feeling bad about not making payments up front. It's standard practice for some organization owners to permit their buyers longer time to pay up. If the debtor becomes conscious that a third party is collecting payment on their behalf, they may possibly not feel at ease. To stay away from any complications it is ideal that the debtor not know about the factoring firm.