Invoice Factoring

Accounts Receivable Factoring: Definition, Benefits, Cost, How It Works

accounts receivable factoring

Whether you’re a new or established business, you know that having access to working capital is key to help keep your business running smoothly. You need to take care of payroll and other expenses, plus have the ability to bid on larger projects and grow your company. But sometimes, cash can be hard to come by. This is especially true when it comes to getting your invoices paid. Many businesses have net payment terms of 30, 60, or even 90 days or longer, which leaves small businesses to cover any gaps in cash flow. One solution that helps with slow receivables is what’s known as accounts receivable factoring or invoice factoring

What Is Accounts Receivable Factoring?

Accounts receivable factoring is a solution that allows small businesses to turn their unpaid invoices into cash on hand. Instead of waiting for weeks or months for your customers to pay their invoices, a factoring company purchases the invoice from you at the full value (minus a fee), giving you cash weeks or even months ahead of the original invoice terms. The invoice company then works directly with your customer to settle the invoice according to the original net terms. This way, you have access to the cash you need to take care of any pressing business needs, while your customer benefits from extended payment terms. 

What Are the Benefits of Accounts Receivable Factoring?

If you’re a small business that wants access to consistent working capital to cover ongoing operational expenses or new expenses that help propel growth, accounts receivable factoring for your business has many benefits. They include: 

  • Provides cash liquidity without the stress of taking on debt or selling equity in your business.
  • Ideal for new businesses. Unless you’ve been in business for a number of years and can prove your profitability, it can be very hard to get funding from a bank or other traditional lender. With accounts receivable factoring that’s not an issue. Because the factoring company is working with your customers, it’s their credit history that is most important. 
  • Allows you to fund a growth project or opportunity to help scale your business. You can even bid on larger projects when you have fast access to working capital.
  • You no longer have to worry about uneven cash flow, and can better manage your day-to-day operations such as covering payroll or purchasing supplies. It can also help relieve any seasonal strain your business may typically experience, and lets you bolster your books by funding at strategic times. 
  • It’s faster than traditional financing options. Working with a bank or other lender to get access to funds can take weeks or even months, and involve a bunch of paperwork. Business accounts receivable factoring can put money in your account often in a matter of days. (Yes, really!)
  • Accounts receivable factoring also helps reduce admin load. Instead of spending your time tracking and chasing down payments, the factoring company takes care of that hassle for you. This gives you back time to do what you do best – growing and running your business.
  • Most traditional financing solutions require the use of personal assets as collateral, but with accounts receivable factoring, your unpaid invoices are the only collateral. Plus, your personal or business credit score isn’t an issue.
  • Accounts receivable factoring provides another source of working capital for your business. You may have a credit card or line of credit, but factoring complements them by providing additional funds on top of those existing financing options.

Cost of Accounts Receivable Factoring

While every company uses their own factoring accounts receivable formula, we can only speak for FundThrough. With us, funding rates range between 2.5% per 30 days or 6% over 12 weeks, depending on which option you choose. Unlike other factoring companies, with FundThrough, what you see is what you get. There are no hidden fees like account set up fees, ACH fees, or processing fees. There’s also no minimum (or maximum) funding requirements, and no long-term commitments after the invoice is paid. 

This is why it’s so important to do your research when comparing accounts receivable factoring companies. You should understand overall total costs, and be aware of any additional charges beyond the discount rate or factoring fee. At FundThrough, our AI-driven technology allows us to offer highly competitive invoice factoring rates.

How to Factor Accounts Receivable

If you want to cover off any short-term cash crunches or need funding for growth, a factoring company like FundThrough can help. 

  • First, see if you qualify and set up a free account. Review available funding options, rates, and send in required documentation (business formation documents, government-issued photo ID, a void check).
  • Next, submit your invoices manually, or connect to a supported invoicing software or accounting software – we’re fully integrated with QuickBooks, Enverus, and Workbench, for added convenience. Select the invoice you’d like to fund and submit it for review. We’ll then confirm the eligibility of the invoice. 
  • Once the invoice is deemed eligible, complete any final steps for approval, after which funds are deposited to your account.

If you’re interested in learning more about small business invoice factoring, our Complete Guide to Invoice Factoring is chock full of information, and answers 45+ questions you might have about invoice factoring.

If you’re ready to get started with accounts receivable factoring in Canada and the United States, FundThrough can help. See if you qualify for our Velocity or Express funding options.

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