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:

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