Factoring Receivables Can Allow Your Business to Turn Outstanding Invoices Into Usable Financing

If a company makes sales, it's likely that it has outstanding invoices.

For every product that a company sells to an established customer, the seller writes out an invoice, as its bill of sale. Each of the business' customers then pay its debt at the interval stated in the original terms of service issued by the seller - typically 30 days, 60 days or, in some cases, 90 days.

The customer orders a product or service. Then the seller creates an invoice and ships the product or completes the required service. And then, the seller waits for its customer to pay.

But what happens when a business needs access to the money that is currently tied up in outstanding invoices? What happens to the business when it knows that the money will be coming, but it is becoming increasingly difficult to wait for the money to come in?

Some businesses choose to apply for financing in the form of bank loans or borrow against their own credit - using credit cards in much the same way as a consumer would. Other companies however, choose to factor receivables.

Factoring receivables is a process by which companies can access the financing they will need, when they need it.

Rather than relying on the relationship between business and customer, receivables factoring brings a third party into the mix. Factoring receivables means having a supplier, a consumer and a factoring company involved in the successful completion of a transaction.

Businesses that factor receivables, in effect, sell their outstanding invoices to a financing company that specializes in accounts receivable financing. Rather than waiting thirty, sixty or ninety days for their customers to pay an invoice, a business exchanges its outstanding invoices for cash, with a factoring receivables company keeping a small percentage of the total amount owed, as their profit for advancing the money to the seller.

As a result, the seller has money that would be coming to it when the money is needed - albeit only 70-90% of what is owed to the seller. The factoring receivables company then goes on to collect payment from the customers, and, after taking their fees from the transaction, provides the seller with their remaining portion of the total amount due to it.

Receivables factoring agencies offer a variety of benefits to businesses - distributors, manufacturers, service providers, transportation companies, and other types of businesses. Some of these benefits include:
  • The ability to get the cash that they need to operate, without accruing debt in the forms of loans or payments on credit while waiting for invoices to be paid;

  • The ability to know that the money that is owed will be there, not tied up in unpaid invoices. By factoring receivables, a business is able to know when payment will be received, rather than speculating when during the thirty, sixty or ninety day period the check will arrive;

  • The responsibility of collecting on unpaid invoices is no longer the responsibility of the seller. Rather than having to hire a collections agency or doing its own collections, the factoring receivables company will take control of collecting overdue payments.

  • Of course, although there are benefits that come to businesses that factor receivables, the practice is not for everyone or for every business. If an operation is small, or if the seller's customers can be relied upon to pay quickly - within two weeks or a month - it may not benefit the seller to factor receivables. If the seller's invoices are for a relatively low amount - even when combined - factoring receivables may not be cost effective for the seller's business.

    However, many larger businesses would not survive without receivables factoring - taking advantage of accounts receivable financing.

    If you believe that this sort of funding would be beneficial to your business, do your research. Understand the benefits that factoring receivables can provide for your business and consider the costs of this type of financing. Then, choose the right factoring-receivables company to serve your business. When your business can turn its outstanding invoices into the cash needed to continue to operate and grow the business, your business will be on the road to realizing its full profit potential.

    Copyright (c) 1st Commercial Credit.
    Toby Seibert writes about commercial finance. 1st Commercial Credit can help you with your business growing pains, with financing rates as low as 1.59%, with no fees and no minimums. They finance invoices from $5,000 to up to $10 million with flexible approval decisions. Call 1-800-450-9653 or visit their website:

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