What is Accounts Receivable Factoring?

Accounts receivable factoring is a financial tool that can help companies with cash flow problems because clients are paying invoices in net-30 to net-60 days. Small business owners are often faced with having to offer term credit to corporate clients. Unfortunately, many owners don’t have sufficient cash reserves to run their businesses, pay their expenses, and wait for payment. Accounts receivable factoring solves this problem.

How does it help?

This program accelerates the revenues tied in slow-paying receivables. Instead of waiting up to two months to get paid, you receive immediate working capital from a finance company using your receivables as collateral. Accounts receivable factoring improves your cash flow, allows you to operate your business, and enables you to take on new clients.

How do you set up an account?

Setting up an account to factor your receivables is relatively easy and can take anywhere from five to ten days. The finance company requires an application, an invoice aging report, and some information about your business. Once they have your application, they perform their due diligence to make sure that your company is a good candidate for the program.

If everything goes well, the factor sets up your account and notifies your clients through a Notice of Assignment letter which provides some basic information about factoring and a new payment address. The Notice of Assignment is fairly standard across factoring companies.

Once these steps are completed, your account should be ready for funding.

How do you finance a receivable?

To finance invoices, you submit the invoices and a schedule of accounts to the factor. The factor verifies the invoices prior to funding. The verification process ensures that the invoice is accurate and that your customer is satisfied with your products and services. Once your invoices have been verified, they are ready for funding.

Most receivables are funded in two payments. The first payment – the advance – covers about 85% of the gross receivables and is wired to your bank account immediately. The second payment – the rebate – covers the 15% that was not initially advanced, less a financing fee, and is wired to your account once your client pays their invoices according to their terms.

You can find more information by reading this article.

What are the benefits?

Factoring your receivables has a number of benefits. The most important benefit is that factoring provides stability to your cash flow. If a client is paying slowly, you can always factor the invoice and accelerate your funds. Also, the line is designed with growth in mind and can increase as your receivables grow.

Lastly, this solution is geared towards small business owners and has relatively simple qualification requirements.

Are there any disadvantages to this solution?

Like any business financing solution, factoring does have disadvantages. The most common disadvantages are:

  • It only solves one problem: cash flow issues caused by slow-paying clients
  • It can be comparatively expensive
  • It requires some customer contact

For many companies, though, the advantages outweigh the disadvantages.

How do you qualify?

Qualifying to finance your receivables is easier than obtaining other business financing products. To qualify, your company should:

  1. Work with creditworthy customers
  2. Have decent gross margins – 15% or more
  3. Have A/R that is free of encumbrances
  4. Be clear of major tax and legal hurdles
  5. Have industry experience

Why work with us?

For a number of years, Commercial Capital LLC (Canada) has been a leading provider of factoring and purchase order financing in Canada. We work with companies in most provinces and can provide competitively priced proposals. For an instant quote, please fill out this form.

We also believe that an informed customer is an empowered client. As such, we keep an extensive website aimed at answering as many questions as possible. However, if you have additional questions, call us at (877) 300 3258.