Selling Accounts Receivable to a Factor - the How and Why

How Factoring of Accounts Receivable Works

How Accounts Receivable Factoring Works
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Businesses need cash to stay afloat, and sometimes cash just doesn't come in fast enough. Factoring is a type of financing that uses a company's accounts receivables. Companies can generate cash flow by selling a portion of their accounts receivables, which represents money owed to the company from their customers for selling their product or service.

Key Takeaways

  • Factoring is a type of financing in which companies can generate cash flow by selling a portion of their accounts receivables.
  • The factor buys the receivables at a discount, such as 60%-80% of their outstanding value.
  • The factor pays the company a cash advance for the receivables and charges fees that might be 1% to 4% of the receivable value.

What Is Factoring?

Factoring means that someone will buy your accounts receivable (often shortened to "receivables"), and they will do the collecting. You can sell all or some of your receivables to the factor, or you can sell individual invoices directly. The factor is the company buying the receivables, which is usually a financial firm that specializes in receivable financing.

The factor buys the receivables at a discount, such as 60%-80% of their outstanding value, and charges interest on the cash advance, fees, and sometimes a commission. The factor may also charge a fee for each invoice or each account.

The reason the buyer cannot advance the full value on your receivables is that they don't know whether they'll be able to collect from your customer or get paid. Also, it may take time and money for them to check the credit on all your customers and to run the collections process.

Factoring is a $3 trillion business and has been around for a long time. Factoring companies are legitimate businesses that make their money by knowing the value of receivables and being good at collecting on them.

What Can I Expect to Be Paid? How Long Does It Take to Get My Money? 

The factor will review your receivables and give you an initial amount within a few days. They will also typically charge a fee for the collection process of 1% to 4%, depending on how difficult the receivables are to collect. The amount of cash paid by factoring companies can vary, but it's usually based on three conditions:

  1. The length of time the receivables have been outstanding
  2. The number of receivables
  3. The credit ratings of your customers

With the initial discount on the purchase of your receivables and the fees, you may not be paid any more than 40% of your receivables' value, but the percentage can vary with each financial firm.

An Alternative to Selling A/R to a Factor

If you need cash and you have many receivables, another possibility might be a working capital loan or a business credit line. The bank may be willing to take your receivables as collateral. The interest rate on this type of loan should be lower than the cost of selling to a factor.

What About My Customers? 

The factoring company wants to treat your customers well for three reasons:

  1. The factoring company wants to get the payment.
  2. The factoring company doesn't want to destroy your relationship with your customers because they want your company to continue to rely on them in the future.
  3. The factoring company must adhere to the same collections laws as other companies. 

Before you Sell Receivables to a Factor:

Use your business financial software service or an accounting firm to prepare an accounts receivable aging report, so you can see who owes you and how long that account has been unpaid.

Can I Use a Factor on a Continuing Basis?

Many factoring companies become de facto outsourcing for accounts receivable. That is, you could continue to turn your receivables over to the factor, so you don't have to spend the time and money to collect. If you have individual customers or clients, you might want to collect personally, but if your customers are other businesses, you might decide that factoring can save you money and hassle.

How Do I Select a Factor? 

Do an Internet search to find a list of factors that work in your state. Then select several to interview. Some key points to look for when selecting a factor:

  • What experience have they had with factoring? How long have they been in the business?
  • Who will actually be doing the contacts with my customers? What is this person's demeanor? Is he/she friendly? Courteous? Be sure that the factor will not destroy your goodwill with your customers.
  • How does the factor contact customers? If possible, review the phone scripts and letters they use to gauge their professionalism and courtesy.
  • Does the factor refer accounts to collections? What criteria do they use for doing this? Do they notify you they are turning over an account to collections? If you have a continuing customer who doesn't pay bills, you need to know this. The factoring company should be in communication with you about their interactions with your customers.

How to Find a Factoring Company

The International Factoring Association has a member directory you can search. Try searching by industry or location.

Frequently Asked Questions (FAQs)

How does accounts receivable factoring work?

A financial firm buys a company's accounts receivables and pays a cash advance based on a discounted value of the receivables. The factoring firm collects the money from the company's customers and, in turn, charges interest and fees.

How much cash can I get paid for factoring my accounts receivables?

The amount of cash paid for factoring accounts receivables can depend on your customers' credit ratings, how long the receivables have been outstanding, and the value of the receivables. Companies might receive up to 80% of their value minus fees, interest, and commissions.


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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Factoring of Receivables," Page 1.

  2. Walden University. "The Effects of Using Invoice Factoring to Fund a Small Business," Page 1.

  3. Capstone Capital Group, LLC. "2020 Global Factoring Report."

  4. U.S. Chamber of Commerce. "Is Factoring Receivables Right for Your Business?"

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