How Does Accounts Receivable Factoring Work?

How Does Accounts Receivable Factoring Work?
So what exactly is accounts receivable factoring? Well very
simply it is the process of obtaining funds by selling your
company's accounts receivable. To go into a little more
detail a company takes the outstanding invoices it is owed
and sells them to a third party company called a factor. By
doing this the company selling the invoices receives an up
front payment on the invoices instead of waiting thirty or
more days to be paid. When the invoice does come due the
payment is sent to the factor instead of your company.
Sounds great right? Well it's not all roses. If you're
considering going this route you'll need to do your
homework. If you don't you might pay a pretty hefty price.

Now depending on whom you talk to the accounts receivable
factoring business is either the greatest thing since
sliced bread or in the neighborhood of borrowing from a
loan shark. Each experience is different and some companies
are on the up and up while others you won't want to touch
with a ten foot pole.

So you can better understand the experience we'll walk you
through what happens. Now assuming you've got a factor
you're intending to work with we'll start from the point of
the sale. You've just finished a large project for a
customer. You issue your bill to them. The first thing the
factor will want to see is a signature showing that they
were satisfied with the work. But let's say you sold them a
product that was delivered at the dock. A receiving clerk's
signature is not going to cut it. You're going to need the
signature of the person that authorized the purchase to
begin with. They'll need to sign the invoice and some other
form of document verifying the purchase was legit and they
plan on paying for it.

Next you'll need to fax those documents to the factoring
company. But you can't do this from your office because you
might have forged those signatures. No they need to be
faxed from the customer's office. And once the factoring
company does receive the documents they may still want to
call and verify the purchase. Now if the purchase was for a
significant amount of money all this hassle may be worth
the trouble but what if the purchase was for a few hundred
bucks. Not worth the trouble you say? Well we have a
problem with that too.

You see when you first sign up with a factoring company
they want to know what companies you do business with. And
which of those you want to have the invoices factored. This
is because those companies that you decide are worth
factoring have to be notified that this is going to be the
case. And the factor will want to run a credit check on the
company. Your customers will also be notified that they
must now send their payments to the factoring company
instead of you. This task also will be left up to you. The
quandary is this if you don't factor an invoice the company
still must send the payment for it to the factoring company
not to you. This will actually cause that particular
payment to take longer than necessary to reach you because
it will go to the factor first and they have to release it
to you.

Once your invoice has been submitted to the factor from
your customer's location you need to check and make sure it
was actually received and there are no problems with it.
After the factor receives the invoice it should only take
about twenty-four hours to be approved. Most factors have a
cut off time each day to receive an invoice if you want to
receive your money the next day.

After the factoring company has approved the invoice you
will receive a wire transfer to your bank. From there the
money is yours to do as you will. Many factoring businesses
would like you to believe that using accounts receivable
factoring is a great way to get the money you need to grow
your business. The truth is that it is not suitable for
many types of businesses. Your billing methods need to be
very straight forward to help make factoring work. And it
helps if you issue fewer invoices but for large amounts of
money. Otherwise the leg work involved can take you away
from what truly matters. And that is focusing on your
business.

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Cash Miller is an experienced entrepreneur and speaker who
has spent over a decade as a small business owner. His
years of experience in small business cover such topics as
planning, management, marketing, human resources,
ecommerce, and taxation. For more small business
information you can go to
http://www.SmallBusinessDelivered.com