Invoice Factoring or Accounts Receivable Factoring is an agreement with a third party to purchase the total amount of outstanding receivables at a discounted amount than the face value of the invoice. This type of factoring provides a quick cash flow accessible to the business, up to 95% of the invoice’s value. When the balance on the invoice is cleared, the factor returns the payment and deducts some fees. The costs of such factoring depend on various factors and can range between 1-10%.
AR Factoring can be good for your business if your business has a cash flow problem and wants to open up a source to access quick financing. Most invoices are set up for payment terms of 30 or 60 days, which means that once the invoice is sent out to the customer, the money is not realized in the business’ bank account for about a month. These long payment cycles put many companies in a constant cash crunch, making it hard to keep up with necessary operating expenses. Companies can use invoice factoring to speed up their cash flow and unlock working capital