Accounts Receivable Factoring 101

LearnAugust 6, 20214 min read
Caroline Lu, Product Marketing Manager

What are Accounts Receivable?

To understand accounts receivable factoring, it is important to first understand the concept of accounts receivable. Fundamentally, accounts receivable is simply the amount of money that is owed to a company or vendor for work done, products delivered, or services rendered.

Typically, a company or vendor will invoice a client for their work (we know you’re saying “duh,” but just bear with us). Every time an invoice is sent to the client, standing in as a confirmation that payment is now due within a certain period of time, accounts receivable are created. Why? Say it with us: Because that outstanding balance is now owed to the vendor.

“But what’s the difference between accounts payable and accounts receivable?” Totally fair question. They are very similar, but they operate on different sides of a singular transaction. Accounts payable are what the client owes to the vendor while accounts receivable are the amounts that the vendor is owed.

What is Accounts Receivable Factoring?

For any company or vendor, making sure you get paid can be just as arduous as the work you’re getting paid for. From following up on past-due invoices to just keeping track of which client was invoiced when, there can be long lead times that make it challenging to keep up with your accounts receivable.

Enter: Factoring.

The process of factoring is the ultimate tool to help vendors and companies get paid faster. Some 101 about factoring:Think of accounts receivable factoring like a bridge that makes every car that goes across it faster. Essentially, a factor is a mediary financial company that a company would use to process its accounts receivable at a discount. When a company uses a factor, that resource then acts as their agent to collect payment from all of its clients.

The result? A more efficient, expedited payment solution.

Factoring helps vendors free up capital for other purposes, like bill payments, inventory, or investment in growth. It also enables the company to eliminate the financial risk of default, because that liability is passed onto the factor.

However, factoring is not a free trade. Factoring companies charge fees for their work with rates depending on the number of receivables that need to be expedited,the quality and trustworthiness of the specific customers they will deal with, the industry of the company, and the outstanding days of the receivables.

What Does Recourse and Non-Recourse Factoring Mean?

Accounts receivable factoring without recourse protects the vendor should the client be unable to pay out an invoice. The factoring company takes on all of the risk of the uncollectible accounts receivables so that the vendor would not be liable for any lost income.

When a factoring company uses accounts receivable factoring with recourse, the factoring company can demand money back if the accounts receivable are not fully paid. This means that the vendor is still financially liable, and they could be required to cover substantial percentages of money that the clients haven’t paid.

Why Should a Company Factor Their Invoices?

There are many ways that factoring a company’s invoices can help vendors be more cash-efficient and streamline their finances.

Money is Received Faster

When invoices are factored, the company is able to turn their receivables into cash, which they can then reinvest back into their business. Factoring can also help close gaps created by clients who are slow to pay back their invoices or other credit. If done right, it is an effective solution for companies who have had issues with slow invoicing payouts.

Cash Flow is More Efficient

Another huge benefit of factoring invoices is that it improves the speed at which cash flows through a company. It creates a system where there can be longer paying terms, but the speed at which capital enters a company is still very quick and efficient. This helps businesses to grow at a much faster rate and be more effective in their day-to-day operations.

Much Easier Approval

Getting credit approval from organizations like banks or other credit-based operations is not always the surest bet. When using factoring, funds enter the company’s accounts faster (usually) without collateral.

Settle’s Solution

Factoring your invoice through Settle helps you get paid upfront. We’ll send you money as soon as the next day and handle collections so you don’t have to.

Our easy-to-use software allows you to manage your receivables and payables all in one place, making factoring, invoicing, and bill payments a total breeze.

The future of cash flow management is here at Settle.

Sources:

SharePlatform iconPlatform iconPlatform icon

Subscribe to our newsletter


OR

Recommended Articles

What Are Net Terms?
Learn4 min read

What Are Net Terms?

Making use of net terms can enable both buyers and vendors to increase their profitability and sales dramatically. This is what net terms are.

Settle Spotlight Series: Q&A with Vividly
Learn9 min read

Settle Spotlight Series: Q&A with Vividly

We sit down to chat with Alyshah Walji from Vividly, a trade promotion management (TPM) software built by and for the consumer packaged goods industry.

What is the Cash Conversion Cycle?
Learn6 min read

What is the Cash Conversion Cycle?

A company’s cash conversion cycle can speak volumes about its operational efficiency and financial stability. It can also determine whether people get paid on time.

Accounts Receivable Factoring 101
Learn4 min read

Accounts Receivable Factoring 101

Accounts receivable factoring can help companies can improve their financial stability and cash flow. We’ll explain what it is and how it's beneficial in our guide.

How to Create an Invoice
Learn6 min read

How to Create an Invoice

Creating invoices can be tedious, especially for new businesses processing everything manually. Learn how to create invoices effectively and efficiently with this detailed guide.

Settle Spotlight Series: Q&A with SourceMedium
Learn14 min read

Settle Spotlight Series: Q&A with SourceMedium

In this month’s Settle Spotlight Series, we chatted with Will Holtz from SourceMedium about how interconnected data can be a superpower for brands in hyperscale mode.

Why Supply Chain Visibility Matters and How to Achieve It
Learn5 min read

Why Supply Chain Visibility Matters and How to Achieve It

Improving supply chain visibility is becoming a priority for many companies, as it’s essential for streamlining operations, boosting efficiency, and maintaining strong customer satisfaction for consumer brands.

Do I Need an ERP to Manage My Supply Chain?
Learn4 min read

Do I Need an ERP to Manage My Supply Chain?

Effectively managing a supply chain is essential for any consumer brand working with a network of suppliers, distributors, and partners. If you're considering an ERP for your business, here are some key factors to evaluate to ensure it meets your supply chain needs.

The 2024 Settle Staff Picks Holiday Gift Guide
Learn2 min read

The 2024 Settle Staff Picks Holiday Gift Guide

Do you really need another gift guide this time of year? Our Settle team spends so much time obsessing over our customer brands, that the right answer is obviously yes. We have compiled the inaugural Settle Staff Picks Holiday Gift Guide, with the most fire small brands out there. So read on for ideas from stocking stuffers to travel accessories – for everyone on your list. And join us in shopping small this holiday. 

Settle 2023 Product Wrap
New Feature3 min read

Settle 2023 Product Wrap

A year in review of Settle's product releases that make running CPG brands easier.

Your purchasing process. Made simple.
New Feature2 min read

Your purchasing process. Made simple.

We brought simplicity to bill pay. Now we’re bringing it to the purchasing process, with end-to-end support that takes a load off your plate.

Invoice vs. Receipt: What's the Difference?
Learn6 min read

Invoice vs. Receipt: What's the Difference?

Invoices and receipts are similar in concept, but differ in the details. Here’s what differentiates invoices from receipts, and why it’s important to understand.

What is an A/P Aging Report?
Learn6 min read

What is an A/P Aging Report?

The Accounts Payable Aging Report is an essential tool for businesses with a large number of accounts payable to track. Here’s a general breakdown of A/P Aging Reports.

What Are the Consequences of Equity Dilution?
Learn5 min read

What Are the Consequences of Equity Dilution?

Equity dilution can be a very concerning process for shareholders who are unfamiliar with its consequences. This is how to avoid equity dilution and keep stocks healthy.

What is the Accounts Payable Process?
Learn4 min read

What is the Accounts Payable Process?

Accounts payable (AP) refers to all the payments that a business owes its suppliers and creditors. Neglecting your accounts payable process can lead to production and supply issues.

Black Friday CPG Prep Checklist
Learn6 min read

Black Friday CPG Prep Checklist

Black Friday sets the tone for your business’ holiday season. Start early on forecasting demand, devising marketing strategies, and preparing your site.

How to Evaluate Accounting Firms
Learn7 min read

How to Evaluate Accounting Firms

Figuring how to find the right accounting firm for your company can be difficult. Here’s how to choose the best accounting firm for any business.

A Guide To Inventory Management for CPG
Learn6 min read

A Guide To Inventory Management for CPG

Learning to navigate inventory management can be a tricky part of growing your brand. Check out our guide to inventory management to find out more about it.

Non-Dilutive Funding Guide for CPG Brands
Learn7 min read

Non-Dilutive Funding Guide for CPG Brands

A popular source of funding is financing from angel investors and VCs. Yet many companies fail to recognise non-dilutive funding — where no ownership is lost.

Navigating Distribution And Retail Margins for CPG Brands
Learn8 min read

Navigating Distribution And Retail Margins for CPG Brands

For emerging CPG brands, navigating challenges like supply chain disruptions and retail changes underscores the critical importance of understanding and managing retailer and distributor margins, as it directly impacts profitability and success in the industry.

How to Find a CPG Distribution Partner
Learn5 min read

How to Find a CPG Distribution Partner

Partnering with the right distributor is arguably one of the most essential tasks for a retail company. Find out what to look for in distribution partners and how to source them.

Accounts Payable vs. Accounts Receivable
Learn5 min read

Accounts Payable vs. Accounts Receivable

Understanding accounts payable and accounts receivable is an essential part of business workflow. So how do they differ? Learn more about them in this guide.

An Introduction to Cash Flow Forecasting
Learn6 min read

An Introduction to Cash Flow Forecasting

A company’s ability to make a cash flow forecast is essential in the world of modern business. Here is everything you need to know about cash flow forecasting.

What Is Amazon FBA and Is It Right For You?
Learn7 min read

What Is Amazon FBA and Is It Right For You?

Using Amazon FBA is a great way for companies to expand their scalability and fulfillment abilities. Here is how it works, and how businesses can benefit from it.

How Long Does a Wire Transfer Take
Learn7 min read

How Long Does a Wire Transfer Take

Wire transfers can be the quickest method of exchanging funds. Knowing how long it takes can help determine whether wire transfer is the best solution.

Guide: The ABCs of cashflow
Learn2 min read

Guide: The ABCs of cashflow

We put our heads together with the folks at IndieCPG to create a guide to the basics of cashflow for new (and maybe even not-so-new) founders.

Settle blog

Insights in your inbox

Join our newsletter and never miss an update on Settle's latest features and industry trends.