How AR Factoring works

Using Accounts Receivable factoring, you sell your outstanding invoices, at a discount, to a financial company called a Factor.  The discount is usually in the 2% through 5% range.

The Factor assesses the legitimacy and credit-worthiness of your customers (the debtors) to  determine whether they can pay their invoices,  and pay them on time - usually 30 days.  You can choose to have all your invoices factored, or just some of them, or just specific customers.

You then negotiate a discount rate with your Factor, based on...
   - the debtors’ past payment history
   - the volume of invoices
   - the average invoice size
   - the average number of days till payment.

The Factor seeks to minimize his losses.  He looks for vendors who pay in full within the prescribed time and prefers large money amount volume, large invoices and shorter payment terms.

Under ‘full service’ factoring, the Factor acquires full control of the invoices.  Debtors are instructed to pay the Factor directly and the Factor assumes the risk of non-payment due to financial distress or bankruptcy of debtors.  You have no part in the collection process. 

Under ‘recourse’ factoring, if a debtor does not pay an invoice, you are obligated to buy it back or replace it with invoices of equal or greater value.  Recourse factoring carries a lower discount rate and is better for you if your customers have a consistent history of  paying their invoices on time.

Within days after the deal is struck, you receive payment for the invoices - generally an initial advance (in the 60% to 80% range) and final payment, less the discount, when the invoices are collected.

Next: Read about the benefits of AR Factoring...