Depending on the size of your business or your financial situation, you may not want to wait for money that’s held up in accounts receivable. Luckily, there is a method known as accounts receivable factoring that is used by businesses to make money from their unpaid invoices while they wait for the customer to pay. This kind of transaction allows enterprises to capitalize on the goods and services that are already provided.
In this article, we’ll explain more about accounts receivable factoring and what’s involved in that process.
What is accounts receivable factoring?
As mentioned above, accounts receivable factoring is a type of transaction where a company purchases a business’ unpaid invoices and then collects payment on them from the investor. Most factoring companies pay the business a large percentage of the invoice upfront and then pay the rest, minus their fees, once the customer pays. Accounts receivable factoring transactions tend to benefit businesses with poor credit ratings, as their credit score isn’t a factor in the transaction.
Recourse and nonrecourse are the two main types of accounts receivable factoring. Recourse factoring allows the factoring company to recoup costs from the invoice’s original owner if they can’t collect the total amount. This is typically less risky and comes with lower fees. Nonrecourse factoring is when the factoring company assumes the risk that they will not be able to collect the full amount, resulting in a smaller payout for the owner.
Accounts factoring receivable costs
The invoice percentage the factoring company pays back depends on a few variables. These include:
- The industry of the business that owns the business. Factoring companies may charge different fees depending on the industry of the invoice owner. For example, a research company may take several months to pay off an invoice since it could take longer for its project to make money. In this case, a factoring company may charge a higher percentage of the invoice amount.
- The credit score of the customer that owes the invoice. While factoring companies don’t consider the credit of the invoice’s owner, they do account for the customer's credit. Customers who owe money on the invoice with a bad credit score may be considered higher risk by factoring companies and offer a smaller percentage of the payout to the owner.
- The type of accounts receivable. Factoring companies that purchase an invoice that is nonrecourse accept the risk that they may not be able to recover the full amount. In these case, the factoring company cannot charge the original owner the differences. Because of the increased risk, factoring companies tend to pay a much smaller percentage on nonrecourse invoices. However, when a company purchases an invoice with recourse available, the factoring company can get their money back from the invoice owner should they be unable to collect. The risk is significantly less.
Get in touch for help!
Don’t put off getting accounting and invoice factoring services for your small business any longer. Reach out to us at BP Financing, and we’ll make sure that you have the money you need to meet your upcoming financial obligations. We offer invoice factoring services to businesses that need money sooner than their clients can pay out invoices. Give us a call at 845-352-3700 or send a message using our online contact form. We want to help you make sure your business is financially secure even before your clients pay you.