What is Accounts Receivable Factoring? Examples & Benefits

Rates may be calculated based on the face value of the eight steps of the accounting cycle the invoice or the amount of the cash advance. Briefly, factoring with recourse means if your customer fails to pay to the factoring company, you’re obligated to pay the invoice back. Since you’re guaranteeing recovery for the invoice, a recourse liability is determined and recorded. When accounts receivable are non-recourse factoring, the factoring company accepts any loss resulting from non-payment.

After your customer’s payment, the factoring company will pay you the remaining 6% of the value of the invoice. To explain the process of factoring receivables, we have set out the seven steps involved in the flow chart diagram below using typical example values based on accounts receivables invoices of 5,000. When a business sells products and services to a customer on account, the goods are delivered and the sales invoice is created, but the customer does not have to pay until the invoice due date. In the meantime, the business has its cash tied up in the customer account receivables until the customer pays.

Detailed Breakdown: How Accounts Receivable Factoring Works

For the nearly 30 million small businesses in the United States—money is certainly a very important metric for determining how successfully a business is operating. We believe everyone should be able to make financial decisions with confidence. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.

1. Let’s further explore the benefits of receivables factoring and its potential positive impact on your business.
2. You can transform your collections processes and turn unpaid invoices into immediate cash through accounts receivable factoring.
3. The decision to factor should align with your overall business strategy and financial goals.
4. When considering factoring vs accounts receivable financing or accounts receivable financing vs factoring, it’s important to note that while they are similar, they have distinct differences.

The factoring company takes on more risk with non-recourse factoring, so rates tend to be higher — and advance rates may be lower. Small business owners have more forms of financing available to them than ever before, including invoice factoring, also sometimes known as factoring receivables. Whether you’re new to accounts receivable financing or not, knowing how you should be accounting for factoring receivables in your accounting software is often a pain point for small business owners. This post will give you a complete overview of accounting for factoring receivables, no matter your accounting software. While there are some specifics unique to each program, the general flow is more or less the same. Before we get into the nitty gritty, though, let’s go over a quick explanation of the various aspects of factoring receivables.

The factoring receivables process diagram is available for download in PDF format by following the link below. Put in the customer name for the qboa sign in outstanding invoice and the full invoice amount in the amount received. Improve your business credit history through tradeline reporting, know your borrowing power from your credit details, and access the best funding – only at Nav.

Summary: When considering accounts receivable financing vs factoring, consider these factors:

When a business factors its receivables, it’s essentially outsourcing its credit and collections process to the factoring company. This arrangement can be particularly beneficial for small to medium-sized enterprises that may not have the resources or expertise to manage their accounts receivable effectively. However, it’s important to note how the type of factoring agreement—recourse or non-recourse—affects these fees. In recourse factoring arrangements, you are responsible if your customer fails to pay the invoice. This reduces the financial risk for the factoring company, often resulting in lower fees.

Recourse vs. non-recourse factoring

During the American colonial period, factors played a crucial role in the textile industry, advancing funds to manufacturers based on the value of goods shipped to the New World. For example, say a factoring company charges 2% of the value of an invoice per month. If the doubtful invoices are not paid by the customer, the business needs to buy them back from the factor and the factor will reduce the amount of the reserve paid over by the 500.

A good factoring company is one that’s available to its clients when they need them. Evaluate email and telephone response times during the sales process to get a feel for how a factoring company values its customer service. Let’s say a business has $100,000 in eligible accounts receivable and the advance rate is 80%.