How Account Receivable Factoring Works
Keeping the capital to always stay in the allocated size can be difficult sometimes. There are situations that cannot be avoided that make us run out cash. As a result, our business growth can be at risk.
My personal experiences told me that even the most optimistic business steps still involve complicated cash flow. Sometimes I ordered a major purchase in the hope of being able to pay for it after I won a big investment deal or I received payment from major clients. However, things could turn out to be different.
Bank loans are the most common method to solve capital issues. However, contrary to the urgent nature of the cash, bank loans processes can take weeks to obtain. Meanwhile, other kinds of lenders are available out there, but they generally apply significantly higher interest rates.
My preferred solution would be a factoring service. This is an alternative where I can sell my invoices for a certain percentage of the value to a factor or a third party. I will receive the cash in an immediate notice, sometimes even as early as 24 hours. Meanwhile, the process of taking care of the invoices is then taken over by the factoring company.
How it works
Typically, we will receive something between 70% and 90% of our invoice value in the front. The factoring company does not do it recklessly. They will conduct a research on our clients to ensure they will be able to pay the invoices on time. The factoring company does not really care about our credit history, but they will ensure our clients have good accounts.
When it is done, the company will send a notice to inform that any future payment should then be directed to the factoring company.
After our client completes the payment, we will receive the rest of the invoice value that we haven’t receive upfront. The factoring company will first take some for its service fee. Usually, the service fee is around 2-6% of the total invoice. The rate can vary for different invoices and different companies. However, it will never be an expensive solution.