Accounts Receivable Factoring is sometimes called “Invoice Factoring.” It refers to when a business sells unpaid invoices to an accounts receivable factoring company or a “Factor” for a discounted rate. It is now the job of the factoring company to collect the payment from your customer. Once the factoring company collects from the client, they pay the small business owner the remainder of the invoice amount, minus factoring fees. Invoice factoring loans are a solution for small business owners who experience a long lapse between when a service is rendered and when the invoice is paid. This type of financial transaction allows the business owner to receive payment on their accounts receivables sooner than they usually would have.

How it Works

When you sell your accounts receivable to a third-party factoring company, the discounted purchase price gets calculated using what’s known as a factor rate. Here’s an example. Let’s say you sold $20,000 of outstanding receivables. And let’s say the factor rate is 3%. The purchase price of your receivables would then be $20,000 less minus the factor rate. So, you’d receive 97% of $20,000. This means the factor company would buy your receivables for $19,400. However, this does not mean you would receive $19,400 immediately. Instead, you’re more likely to receive an upfront advance. For example, let’s use 85% of the purchase price. So, you would receive $16,490 now. And then, once the factor collects on your receivables, you’ll receive the remaining 15% (that works out to $2,910) of the purchase price of your receivables. If it takes longer than 1 month to collect your invoices, you may be charged an additional 3% per month until the invoices are paid.