![]() ![]() How Does Accounts Receivable Factoring Work?Ī borrower’s management team assigns or sells the account receivable at a discount to its face value. A/R factoring is more expensive than a traditional bank line of credit but offers higher advance rates and greater flexibility around the uses of the loan proceeds.The borrower assigns or sells its accounts receivable (or specific invoices) in exchange for cash today. ![]() Accounts receivable factoring is a source of debt financing available to businesses that sell on credit terms.The transaction permits the borrower to have cash today instead of waiting for the payment terms to be settled in the future.Īside from the advantage of getting cash upfront, accounts receivable factoring is also commonly employed as a strategy to transfer payment risk to another party (in this case, the factoring company). This expected future payment sits as an account receivable (a current asset) on the vendor’s balance sheet.Ī management team may choose to sell or assign this account receivable (or a specific invoice) to a factoring company at a discount to its face value in exchange for cash. The transaction takes place between a business (the borrower) and a lender (often a factoring company as opposed to a traditional commercial bank).įactoring is only available as a funding source for companies that sell on credit terms, meaning that a borrower (the vendor) sells a good (or service), generating an invoice to its buyer for payment at a later date (terms may be 30, 45, or 60+ days). Updated JWhat is Accounts Receivable Factoring?Īccounts receivable (A/R) factoring, often referred to as invoice discounting, is a type of short-term debt financing used by some business borrowers. ![]()
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