Factoring Accounts Receivable

What is Factoring Accounts Receivable?

If your business sells to customers on credit, you will generate invoices and have accounts receivable representing amounts due from your customers. Rather than wait for your customers to pay you and deal with the problems of collection, you can factor accounts receivable.

To factor the accounts receivable means that you sell your invoices to a factoring company. The factoring company is then responsible for collecting the accounts receivable in return for which it charges you a commission, normally based on the value of the invoices factored.

Factoring accounts receivable allows you to obtain cash advances from the factoring company which frees up cash from working capital.

How to Factor Accounts Receivable

The typical process for factoring accounts receivable is as follows:

  1. Sell goods to customers on credit terms and generate invoices.
  2. Submit invoices to the factoring company.
  3. Factoring company advances your business cash based on a percentage of invoice value.
  4. Factoring company collects the accounts receivable from the customer.
  5. Factoring company pays your business the balance of the invoice after deducting a commission fee based on a percentage of the invoice value.

For further information on factoring accounts receivable see see the Wikipedia definition.

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Last modified March 23rd, 2016 by Team

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