Simply put, accounts receivable factoring is a type of service in which companies can get advance money on the invoices that they have assigned to customers on a weekly, monthly or biweekly basis. What normally happens is that factoring companies will buy the receivables from the company and get the payments from the customer on the invoices they owe until they are fully paid off. In exchange for buying them and managing the process of collecting, they get to keep a small percentage of what the invoices are worth.
The process to undergo accounts receivable factoring is actually very simple. The company goes to the appropriate company and offers to sell the current receivables they have. If the company thinks it is worth the risk to buy these invoices, then they will accept the offer and buy them. The amount they give is made in one large payment, and customers then must remit payment to that company using a drop address that the company sets up. As customers pay off the invoices, the company will also give payments to their client while keeping some of the funds for handling the process.
Part of the agreement includes the service must handle collecting the money from customers billed on the invoices. This means that the factoring company will be the ones to directly speak with the customers if they should fail to pay the money they owe on the invoices. Should the customer not pay their invoice, then the factoring company will resell the invoice and not factor any new invoices made to that customer.
Businesses might want to go through with this method of financing for a number of reasons, the main one being an issue with cash flow. If there is unexpected growth or a difficult financial period, then they might need money from invoicing to keep up with debts or other obligations. Since up to 90 percent of the value will be paid all at once, the business can remain loyal to their financial obligations, which makes them still favorable to vendors.
Another case where a company might want to investigate accounts receivable factoring might be after a failed takeover attempt or merger. When this happens, this can leave very few reserves, so honoring debts and meeting payroll will mean having to work with a factoring company to get most of their invoices in advance. Additionally, they will get most of the remaining value when customers pay off their invoices that are outstanding.
Naturally, there are several kinds of services on the market for this kind of financing. Most have the same kind of plans for payment, but you will want to check out all of the terms that the company has to set because agreeing to the plan. Some might have small percentages collected or higher up front advance payments, and companies will differ in how they can cancel the agreement. Make sure you go through all plans and compare them before making a commitment since this is the best way to avoid problems in the long run.