Accounts Receivable Financing

Accounts-receivable financing is a type of asset-financing arrangement in which a company uses its receivables — outstanding invoices or money owed by customers — to receive financing. The company receives an amount that is equal to a reduced value of the receivables pledged. The receivables' age largely impacts the amount of financing the company receives.

This type of financing helps companies free up capital that is stuck in unpaid debts. Accounts-receivable financing also transfers the default risk associated with the accounts receivables to the financing company.

Accounts receivables financing companies typically advance companies 70 to 90 percent of the value of their outstanding invoices. The factoring company collects the debts and pays the original company any remaining amount beyond the financing amount minus a factoring fee.

Factoring companies take several elements into account when determining how much to offer a company in exchange for its accounts receivables. In most cases, accounts receivables owed by large companies or corporations are more valuable than invoices owed by small companies or individuals. Similarly, new invoices are more valuable than old invoices. Generally, the easier the factoring company feels a bill is to collect, the more valuable it is, and the harder a bill is to collect, the less it is worth.

This type of asset-based financing allows companies to get instant access to working capital without jumping through the hoops or dealing with the long waits associated with getting a business loan. When a business leverages its accounts receivables to boost its cash flow, it also doesn't have to worry about repayment schedules. Instead of focusing on trying to collect bills, it can focus on other core aspects of its business.

In addition to providing a unique financing option for businesses, factoring companies also offer other services. These accounting-centered services include running credit checks on new clients and generating financial reports.

Although factoring offers a number of diverse advantages, it sometimes carries negative connotations. In particular, financing through factoring companies typically costs more than financing through traditional lenders. As a result, businesses that turn to factoring companies are sometimes perceived as having poor credit or to failing financially. However, industry analysts claim these misgivings are not founded on reality, and they state all manner of upwardly mobile, successful companies use accounts-receivables financing when needed.