The Lowdown on Receivables Factoring

Businesses that cannot obtain the financing or terms they want sometimes resort to the use of receivables factoring. Basically, the factoring of receivables involves the sale of a business's accounts receivable at a discount--to some third party, usually a commercial finance company.

The cost of factoring is higher than the cost of a conventional loan, which means that receivables factoring should generally be used after conventional financing alternatives have been exhausted. However, a new, growing company, perhaps unable to obtain a loan or to obtain favorable loan terms, can benefit from the quick cash turnaround of receivables factoring.

Note: A factor's decision to buy accounts receivable is based on the creditworthiness of the business's customers, and not the creditworthiness of the business itself.

A factor will generally pay up to 80% of the face amount of invoices for creditworthy accounts receivable (those with few slow or non-payers).