Account receivable factoring, is a great way to help manage cash flow by providing you with an alternative to traditional bank loans. It is the selling of accounts receivable or invoices in order to secure immediate, working capital (cash) instead of waiting for longer periods. Accounts receivable factoring frees up your time for higher-value activities, reduces stress, and frees up working capital.
Factoring has been used by businesses for many centuries but as twentieth century brought great change to the way industries work. Businesses started realizing that they need more and more working capital to counter the competition. And factoring provided the perfect solution for companies facing cash-flow problems.
If your business provides products or services on credit to customers on net terms, as per terms you must wait for a perios before you can actually get paid. In other words accounts receivable are future payments that you are allowed to collect for goods or services provided after an agreed amount of time.
A factor company purchases your receivables and gives you an advance payment up front. After charging a small fee the remaining balance is released upon full receipt of payment for all the receivables/invoices. Factoring relieves the seller of the burdens of the collections process and usually the liability for non-payment of an invoice.