There are times when companies, particularly those that provide credit terms to clients, face challenges with cash flow. In such situations, factoring receivables is an excellent option, allowing businesses to receive funds for outstanding invoices before their due date. But what exactly happens during the process of factoring receivables?
What is Receivables Factoring?
Factoring receivables is the act of selling outstanding invoices to a third party (also known as a factor). This is a versatile financing tool used across all types of industries, including:
- Transportation and Logistics
- Information Technology
- Food and Beverage
- Printing and Publishing
- Wholesale Trade
- Energy and Utilities
- Consulting and Professional Services
What Happens When a Company Factors its Receivables?
Factoring your unpaid invoices means selling them to a third party known as factor.
When you factor your receivables, the factor then takes ownership of these invoices after paying you upfront, which saves you the hassle of having to wait 30 to 90 days for your customers to pay you.
After purchasing your unpaid receivables, the factor collects them from your clients in exchange for a small fee.
To learn more about factoring, read our previous blogs, “Do Factoring Companies Check Your Credit” and “Factoring of Accounts Receivable vs Pledging: What Is the Difference?”
What are the Advantages of Factoring Receivables?
Factoring receivables offer a variety of advantages, such as:
- Improved Cash Flow. Factoring provides businesses with a much-needed cash injection, allowing them to continue their operations and pay their bills on time.
- Avoid Bad Debt. As factors take responsibility for collecting payment from the debtor, businesses can reduce their credit risk exposure and protect themselves from non-payment.
- Faster Payment. With a factor, businesses can receive payment for their outstanding invoices much faster than they would if they had to wait for the customer to settle the bill. This accelerated payment cycle enables smoother and more efficient cash flow management.
Wrapping It Up
Factoring receivables can provide businesses with an additional source of funding during times of financial hardship.
In general, after factoring your receivables, the factoring company will pay you upfront and then will proceed to collect the invoices from your customers in exchange for a small fee.
By understanding how factoring works and its advantages and disadvantages, you can make an informed choice that will benefit your business in the long term.
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.