Companies factor in order to receive cash quickly on their receivables, rather than waiting for the 30 to 120 days it takes for customers to pay. Factoring allows companies to quickly build up their cash flow, which makes it easier for them to pay employees, fulfill orders and grow.
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Accounts receivable factoring involves the sale of accounts receivable to a factor. The accounts receivable factoring client sells goods or services to their customer and issues an invoice. The factor purchases that invoice at a discount and advances payment up to a certain percentage of the overall value (typically between 70-90%). The factor then collects payment directly from the end customer.
After delivering a product or service to your customer, you simply invoice your customer and submit a copy of the invoice to the factor with the necessary paperwork (schedule of assignments). This can be done electronically or with paper invoices depending on how you are set up with your clients.
AR factoring costs vary depending on the quality of credits or customers you are dealing with and the size of the factoring facility. The projected volume of the deal can also affect the rate.
80% is a standard advance rate for a new factoring client. The advance rate can go up or down depending on the financial condition of the client, strength of the end credits, and selling terms.
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