Accounts receivable financing (also known as factoring, accounts receivable factoring or invoice factoring) is a financial transaction where a company sells its accounts receivables (invoices) to a third party at a discount.
Accounts receivable financing provides you an advance on your slow-paying invoices so that you no longer have to wait 30 days or more to get paid. It allows you to meet payroll, purchase new equipment and invest in the growth of your company.
There has always been a need for flexible finance solutions. Accounts receivable financing is one of the oldest forms of financing in history. As everything does, accounts receivable financing evolved throughout the centuries and made its way into different industries.
The Mesopotamians created factoring (accounts receivable financing) to help with their business deals, and the rules for factoring were incorporated in the Code of Hammurabi.
Many business deals in England used a form of factoring when purchasing and selling clothing and grain. Often these goods needed to be transported over great distances, and factoring provided immediate payment to producers, who otherwise would have waited until delivery was made to be paid. The immediate payment allowed these early businesses to cash flow their operations to pay for equipment, supplies and raw goods. The process was very similar to today’s version of accounts receivable financing.
Accounts receivable financing came into the new world with the Pilgrims. The people needed quicker payments on raw materials shipping from America to England.
The textile industry grew rapidly and factoring was a way many could finance their businesses, allowing these companies to purchase cotton and other raw materials. The steady cash flow helped these companies deal with long sales cycles resulting from a crude transportation and distribution system.
Interest rates were on the rise and banks were tightening up on extending credit. Many private factoring companies began opening up, and factoring continued to grow as a way to get financing.
Accounts receivable financing continues to be a solution many businesses turn to for financing and growing their companies. Although many factoring companies help a wide range of industries, accounts receivable financing seems to be most common in industries such as oil and gas, telecom, trucking, staffing, pipeline and healthcare. These industries tend to have slow-paying customers with payment trends from 30 to 90 days.
Throughout history, accounts receivable financing changed to meet business and industry demands. However, the basic concept of advance on payments has stayed the same. Below are the steps on how accounts receivable financing works today.
The first step is choosing the best factoring company for your business. There are thousands of accounts receivable financing companies. Making sure you pick the right one for your business and industry is important. Do your research on things such as advance rates, fees, whether it is recourse or non-recourse factoring, customer service availability and any additional services the factoring company may offer.
Once you have selected the best factoring company for your business, the factoring company sends out a notice of assignment to your customers. This tells your customers where to send future payments.
Send your invoice directly to your factoring company rather than your customers. Your factoring company will ensure the invoices get to your customer.
The factoring company advances you on your invoices – typically up to 95 percent, within 24 hours. Instead of waiting to get paid, your factoring company does all of the waiting for you.
Once your factoring company collects on the invoice, it pays you the remaining balance, minus a small fee.
If you are waiting 30-90 days for customer payment, accounts receivable financing could be the right solution for you. Contact Scale Funding to get started. (800) 707-4845