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
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
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
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