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 back-office 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 you receive cash immediately instead of waiting for your open-account customers to pay you.
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