Accounts Receivable Factoring - What is it and how does it work?

what is AR factoring

What Is Accounts Receivable Factoring?

Accounts receivable factoring is a transaction where a business sells their accounts receivable to a factoring company to receive cash tied up in the outstanding AR. This enables growing businesses to continue to have working capital even if they are to grow exponentially in a short period of time.

The factoring company would be purchasing these accounts receivable at a discount and then waiting on their clients customers to pay the invoice, whether that be in 30, 60 or 90 days later.

The discount amount depends on a number of different things, such as the dollar amounts of the invoices you are selling, how long it takes for your clients to pay, how credit worthy your customers are and which factoring company you choose. This rate can vary from under 1% of the invoice value too 3 or 4%.

How AR factoring works

Note: All advance rates and discount rates or fees are agreed upon while being set up.

Step 1: A business sends their invoices to the AR factoring company to receive 80% to 95% of the amount of the factored invoices the same or next day. For example, if you send $250,000 worth of invoices or accounts receivables and get a 90% advance, you will receive $225,000.

Step 2: The AR factoring company holds the remaining 10% or $25,000 as security until the payment of the invoice or invoices has been received.

Step 3:The factoring company collects payment over the next 30 to 90 day period depending on your clients payment terms.

Step 4: Once the payment has been received, the factor pays you, (the seller of the invoices), the remaining 10%, less the factoring fee, which typically runs 1% to 3% of the total invoice value.

Why use accounts receivable factoring?

The reason why so many companies utilize a finance facility like this is the following:

  • Factoring greatly improves cash flow which can fuel growth, in turn a companies’ bottom line;
  • It gives potential for unlimited growth, while paying a small fee to do so.
  • The business owner does not take on any debt
  • It builds your business credit and gives you the ability to make payroll and take care of obligations on time.

    The Basics of Accounts Receivable Factoring

    Great For: Business small and large with receivables Eg Staffing, Oil & Gas, Transportation, Manufacturing etc.
    Funding Amount: 10K-25 Million Dollar Lines
    Advance Rate: 80-95%
    Discount Rate: 0.3% - 4%
    Years in business No requirement! (We have funded many great startups)
    Qualifications: Creditworth customers and invoice B2B or B2G customers
    Repayment Terms: Client pays to factor on terms. Typically 30-90 days.
    Application Process Easy and Online, E-sign enabled

    Who is Meritus Capital?

    Meritus Capital has been providing accounts receivable factoring to businesses across the U.S and Canada for almost 20 years. We fund startups to businesses doing hundreds of millions of dollars in revenue. A representative would be happy to speak with you about your funding needs and put together an AR factoring solution that is a good fit for you. Call us today at 1-877-648-3709

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