What is Factoring?
In a factoring arrangement, a company sells its accounts receivables to companies such as Factoring Services Unlimited. The client receives money, usually in 24-48 hours after submitting their invoice.
The factoring company provides the credit checks, collection of the invoices, and any necessary account procedures for the accounts receivable (also referred to as invoices).
What are Accounts Receivable?
Accounts receivable are unpaid invoices owed to you by your customers. The total of all your accounts is listed as a current asset on your balance sheet.
Invoices are created when a service is performed or a product is accepted by your customer.
How does factoring work?
You bill the invoice to a customer in the usual manner, except when the invoice is created, the original is provided to the factoring company.
Upon verification of the invoice, the factoring company advances an agreed upon amount of the invoice. This usually happens within 24-48 hours. An agreed rebate amount is returned once payment of the invoice is received. A negotiated fee between you and the factoring company is agreed upon.
The client’s customers are instructed to make payment directly to the factoring company instead of the client; this eliminates confusion for the accounting departments that process payment for the invoices.
How can Factoring
help my business?
What does it cost?
Factors charge a fee per invoice; the fee is based on the following:
Helps meet payroll demands
Allows for the purchase of needed supplies and materials
Provides needed working capital
Provides basic operating cash
Helps your company grow faster without creating huge debt from lenders
The average dollar amount of the invoice
The number of days it takes for payment to be received
The amount of monthly sales sold to factor by the client. The more sales, the better the rate