Accounts Receivable Financing: How the Process Works

October 9, 2023

Financial institutions developed financing receivables as a means for businesses to generate immediate cash while they waited for their invoices to get paid. There are two basic approaches to financing with receivables. With secured borrowing, the accounts receivables stay on your businesses balance sheet and acts as collateral for a loan. The financial institution is the holder of a note receivable. The other transaction, known as accounts receivable factoring, involves your company selling its receivables to a factoring company. The receivables are removed from your books and are added to the factoring company's balance sheet at their fair value.

Here is a step-by-step breakdown of how the process works:

Step 1: The seller of the accounts receivables gets 80% to 90% of the amount of the factored invoices within 24 to 48 hours of selling the invoices. For example, if you sell $500,000 worth of accounts receivables and get an 90% advance, you will receive $450,000

Step 2: The Factor keeps the remaining 10% or $50,000 as security until the receivables are collected.

Step 3: The factoring company collects the receivables over a 30 to 90 day period.

Step 4: Once the payments are collected, the factor pays you, (the seller of the invoices), the total amount collected less the factoring fee, which typically runs 1% to 3% of the total payments. The quality of the receivables and the length of time it takes to collect the payments determine the cost of the factoring fee. For example, reliable payers who pay within 30 days may only incur a 1% fee, while slow paying customers who take more than 60 days may be assessed a 2% or 3% fee.

Staffing Companies

Here is how a staffing company can benefit from factoring. Your accounts receivable, (the payments for your temporary workers), is due after 30 or 60 days. In the meantime, you still have to pay your workers weekly. You can use the advance to pay the workers until you receive payment from your invoices and continue to operate and grow your business, adding more clients who need temporary employees. Factoring provides you the cash flow to expand your staffing company faster.

Trucking Companies

When you book a load, you transmit the details of your customer and the confirmed rate to your factor. If they issue an approval, you transport the load. Once you have delivered the load, you send in your Bills of Lading and other documents pertaining to the load. You will typically receive a direct deposit of 80% to 90% of the billing to your account within 24 to 48 hours of the factoring company receiving your documentation. After the payment is collected from your customer, you will get the remainder of the invoice less the factor's fee, which normally runs 1% to 3% of the total invoice.

Obviously, this is a general overview of how the process works, but many factoring deals can be customized to your specific needs. Contact us with the specifics of your situation and we can give you more exact details on costs and terms.


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