When businesses sell to customers, the typical model includes immediate payment for goods or services, which allows the business to have access to cash for replacement inventory, to pay staff and to cover the overhead for the business.
When a business sells to another business, agency or entity, it is very common for the buyer to be invoiced with 30,60 or possibly even 90-day terms for payment. This creates a time gap for the seller that can significantly hinder the company because of the lack of cash flow.
To get around this issue and to prevent the need to apply for a traditional type of bank loan or a line of credit, many smart business owners turn to the sale of accounts receivable. This is not a loan, nor is it a line of credit.
A Quick Summary
In a simple way, the sale of accounts receivable allows a business owner to receive funding for a percentage of the value of the invoices. Through many factors, this will be approximately 80% of the value but there may be times when it is higher or lower based on risk, age of the accounts receivable and other factors. This money is transferred into your business account, often in just days from the initial application for factoring.
The factor then collects from your customers for those invoices, eliminating the need for you to continue to manage those accounts receivables. Once your customer has paid the invoice in full, the factor deducts fees from the residual amount (the 20% held back). Anything that remains will be forwarded into your account.
All types and sizes of businesses can make the decision to use the sale of accounts receivable to provide readily available cash. With no interest and no repayment, this is a very effective option for virtually any company operating on B2B sales or invoicing government agencies.
