Factoring, or receivables factoring, is the selling of a company's accounts receivable at a discount, to a factor, who then assumes the credit risk of the account debtors and receives cash as the debtors settle their accounts. This is also called accounts receivable financing. If you are looking for information on small business factoring, how a factoring receivable works, or you are shopping for a factoring company, then this web page can be a valuable asset in your search.

Factoring receivables can also be known as invoice factoring. This is an excellent way for a company to unlock the cash it has tied up in unpaid invoices. Unleashing your cash flow can help you achieve a healthier financial position and help you achieve further growth.

How does invoice factoring or factoring receivables work?
Factoring works like this: The factor service company fully manages your sales ledger and provides you with credit control and collection services of all your outstanding debts. When you issue an invoice upon a sale, it is sent to the factor who will typically advance up to 80 to 90% of the invoice amount to you. The balance, less fees, is paid when the customer makes a payment directly to the factor. The factor services are disclosed to your customer usually through a letter or attached note that comes with the invoice--this also contains the payment instructions to the factor.

The costs involved are a service charge calculated as a percentage of the factored sales, plus an interest charge for the cash advances. The service charge can include other services, such as collection and sales ledger management, and can run from 0.6%-3.0% of turnover. The interest charge is calculated similar to bank overdraft rates, based on the daily usage of funds.

The advantages of receivables factoring are:

• Funding is flexible in comparison to traditional finance based on historical balance sheet ratios.
• Extra up-front finance gives you extra bargaining power in dealing with suppliers in the form of bulk purchase or prompt payment discounts.
• Access to credit ratings allows confident trading with new customers avoiding bad debts.
• Professional credit control leads to faster cash flow, providing freed funds to take advantage of business opportunities.
• Extra expert help can be extended when expanding into overseas markets.

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