There are several different options that any business has for obtaining funding. One option is to consider a small business loan through a bank or lending institution. Another option from similar sources is a line of credit.
These funding opportunities are very difficult to obtain or small businesses, startups and even for many established businesses because of the type of industry or the current economic conditions.
A very different option is to work with a factoring service. This will provide funding on current accounts receivables to provide immediate cash. To understand the benefits of this option, let’s take a closer look at a factoring accounts receivable definition.
A Simple Factoring Accounts Receivable Definition
Factoring accounts receivable is a very old method of funding business. It involves a company selling products or services to another business and then invoicing for the product and/or work completed.
The buyer has 30, 60 or 90-days to pay, which leaves the seller without the funds for work or products already provided. A factor is a third-party business that will buy those accounts receivables from the business.
The factor provides 80% or more of the face value of the accounts receivables to the business immediately, typically within a few business days, and holds back about 20%. The factor then collects the amount of the invoice from the customer as per the terms of the invoice.
Once the invoice is paid to the factor, the fees are withdrawn from the 20% holding and any residual amount is transferred to the seller’s account. The factor earns fees based on the amount they factor while the business (seller) has immediate use of 80% or more of the invoice without waiting for one or more months.
With this simple factoring accounts receivable definition, it is easy to see how small businesses can benefit from this funding option. Remember, this is not a loan, so there is no long-term repayment plan and no interest, making it an excellent funding option.
