Accounts Receivable Factoring Explained In Detail

Consumer CollectionsThe accounts receivable department is a major part of any business. Accounts receivable factoring is commonly known as invoice factoring or selling away accounts receivables. It is becoming a common business practice, so it is important to understand exactly what it entails.

There are two sides to accounts receivable factoring: the organization and the factoring company. This company purchases the receivables for a set amount of money. A business sells its receivables to gather needed money up front for expansion instead of waiting to get paid by their customers. The factoring company will pay a smaller amount than the actual receivables and keep the rest as profit. They benefit from this, as does the business as it alleviates the risk taken from waiting to get paid from the customers.

Accounts receivables factoring has become increasingly common because businesses are searching for ways to increase their available cash. It can be explained as outsourcing invoices for a low fee and collecting dues at a faster pace.

Accounts receivable factoring can be done by any company that wants a faster flow of cash on hand or wishes to enlarge its operations. For example, if a business offers customers credit that is to be paid in net terms, they must wait to receive the money. Until this happens, the business takes on the risk of whether or not they will ever receive their payment. Therefore, if a customer owes $50,000 on a 60 day schedule, but in 30 days there is a chance to sell a large volume of product, the business will want to take advantage. However, since they may be low on funds while waiting for the $50,000, they can sell the due amount to a factoring company at a loss of a small percent. If a large return on investment is possible, it is worthwhile.

There are many reasons that a business may decide to work with a factoring company. First, it is a good way to free up liquid capital. In the process, it will release the business from the burden of responsibility of collecting money from customers who pay slowly or not at all. Factoring allows more orders to be filled, which increases sales. In the end, there will be more money available to fund payroll and expansion of inventory and equipment. As anyone can see, accounts receivable factoring is certain to grow into the future. It benefits both sides with little to no drawbacks.

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