Factoring Receivables

Factoring receivables is when you sell your accounts receivables to a third party. The factoring company can be a bank, finance company, or a firm the deals exclusively in factoring.

Most factoring companies pay you a percentage of an invoice up front (usually 65 to 90%) and then you receive the difference, less a factoring fee, when the factoring company is paid by your customer. The fee charged by the factoring company is usually based on the time it takes for your customer to pay. Many factoring companies charge 3 to 5% if they are paid in the first 30 days and then an additional 3 to 5% for each additional 30 days that it takes your customer to pay. Most factoring companies require that you buy back any receivables over 90 days.

Here’s an example of how factoring works. The factoring company pays 65% up front, charges 5% for each 30 days your customer takes to pay, and you are required to buy back any invoices that are over 90 days. If you factor a $100 invoice, the factoring company will pay you $65 up front. If your customer pays within 30 days, you will receive $30 ($35 held back less $5 fee), within 60 days, you will receive $25 ($35 held back less $10 fee), and within 90 days, you will receive $20 ($35 held back less $15 fee). If the invoice is not paid in 91 day, you will have to pay the factoring company back the $65 you were paid up front less a fee or service charge.

On my next two post I will discuss the advantages and then the disadvantages of factoring your receivables.

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[Invoice discounting]

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