When you need financing for your small business, there are lots of options available to you. Some options are harder to obtain than others. Knowing your options can help you pick the best path for your organization. One option that many small businesses may not initially consider is accounts receivable factoring.
What Is Accounts Receivable (AR) Factoring?
AR factoring is not really a loan but can be an effective source of financing for your organization. In this scenario, you will sell your AR to a factor, who then collects from your customers. You get a percentage of the receivables up front and the balance is collected, minus what is taken by the factor. While this is traditionally considered the last resort option, it has gained popularity in recent years because it has become harder for small businesses to obtain financing from traditional financial institutions. Terms are negotiated based on a number of factors, including your customers’ payment history, average invoice size, the volume of invoices, and the average number of days until payment.
Two Types of AR Factoring
There are two primary types of AR factoring: full-service factoring and recourse factoring. Full-service factoring occurs when a factor assumes all responsibility and control of the debt, even if the payment is never received from the customer. Usually, this type of factoring comes with a bigger discount when purchasing the AR. In recourse factoring, you are required to pay back the factor if the customer never repays. This approach is good if your customer has a history of repayment on time so you can get the financing from AR factoring.
If you need financing for your organization and have accounts receivable, AR factoring may be a good option for obtaining financing without having to go through traditional processes. With the right type of factoring and the right terms, it can be an effective source of financing for your organization to achieve its financial goals and objectives.