Factoring Receivables: Your Guide to Factoring

The factoring company will take a cut — called their factoring fee — before paying you the rest of what you’re owed. The factoring fee will be charged at regular Law Firms and Client Trust Accounts intervals until your clients pay their invoices. Rates may be calculated based on the face value of the invoice or the amount of the cash advance.

“Recourse” means that a portion of cash advances may have to be repaid to the factor if collection efforts are unsuccessful. While many large, successful companies routinely factor receivables, https://personal-accounting.org/accounting-for-startups-7-bookkeeping-tips-for/ SMEs may be unfamiliar with this financing option. In a factoring arrangement, a firm sells its receivables to a financial institution (a factor) for cash, but at a discounted price.

DISADVANTAGES OF FACTORING RECEIVABLES

Organizations can pick which receivables or sections of receivables are factored in, and they can investigate their clientele’s creditworthiness before electing to factor in an invoice. Regarding funding, businesses want greater control and agency, which factoring provides. Companies must put up security, incur debt, and make monthly payments on the sum owing despite whether sales are strong or low. Factoring, on the other hand, is easier, more transparent, and puts businesses in control.

Factoring can also get you through slow seasonal times when your loan or other financing is not enough. Here’s a look at the different types of factoring receivables and how they work. In practice, the credit to accounts receivable would need to identity the specific subsidiary ledger accounts that were factored, although to simplify the example this is not done here.

How Does Accounts Receivable Factoring Work?

There are plenty of small business financing options for companies needing working capital to maintain cash flow or invest in growth and expansion. Deciding the best option requires due diligence and thorough accounting for all costs. Whether you’re currently factoring invoices or considering a factoring agreement, ensure you understand how to account for factored receivables with accurate journal entries. The factoring company issues payment for a percentage of the total accounts receivable value minus the discount rate called the advance rate.

If you don’t want your customers alerted when you sell their invoices, look for a company that doesn’t notify them. Factoring fees are as low as 0.50%, with cash advance rates ranging from 75% to 90%. Let’s assume you are Company A, which sends an invoice of $10,000 to a customer that is due in six months. You decide to factor this invoice through Mr. X, who offers an advance rate of 80% and charges a 10% fee on the amount advanced. The factoring company retains the remaining percentage (usually 8-10% of the total invoice value) as security until the payment is made by the customer.

Fast Access to Cash

Understanding the step-by-step process of accounts receivable factoring helps you grasp how it can provide immediate cash flow by converting your outstanding invoices into working capital. Now, let’s move on to the next section and explore how to calculate accounts receivable factoring. Accounts receivable factoring companies will buy your receivables for 50% to 90% of the total invoice value. Then, your customers will pay their invoices, in full, directly to the factoring company. They absorb the losses if the invoice is not paid in the event of nonrecourse factoring.

• If your customer takes 3 months to pay, you would have to pay the company $300.
• If you’re interested in learning more about accounting for factoring of receivables, our Complete Guide to Invoice Factoring answers 45+ questions you might have about the invoice factoring process.
• The best factoring companies are able to advance funds to their clients within one business day, and they charge minimal fees.
• This type of factoring often requires a personal guarantee, but may come with lower fees and higher cash advances.

The first part is the “advance” and covers 80% to 85% of the invoice value. The remaining 15% to 20% is rebated, less the factoring fees, as soon as the invoice is paid in full to the factoring company. In its long history, eCapital has bought more than 22 million invoices and worked with over 30,000 clients. With offices throughout North America and the UK, eCapital’s rates are relatively competitive.

How Much Does it Cost to Get a Factoring Company?

You’ll avoid the hassle, stress, and time required to collect late invoices and the factoring company gets paid for their funding and collection services. Note that some factoring companies have “non-recourse factoring” in their contracts. This means that if the invoiced client does not pay, they will ask you to repurchase the invoice. This is an important detail so be sure to check the contract closely and ask if you have any questions about fine print. With factoring receivables, a factoring company purchases your unpaid invoices and pays you a portion of the invoice value upfront. The advance rate varies depending on the company, but generally ranges from 75% to 100% — or the full invoice amount — minus fees.