Receivable funding, usually called account receivable factoring, can be a useful way for a small and growing business to get quick capital in exchange for its account receivables. Many companies have billing periods of 30, 60, or 90 days, during which time the customers don’t pay the business. However, the company may be in need of money right at that time. Receivable funding allows that company to sell those uncollected invoices to another company—a factor—for hard cash. That money can then be immediately invested into the company for vital purposes, growth opportunities, etc. The seller can expect a fee of about 2-10% on the it receives from the factor, so if the seller is not in need of immediate capital it’s generally better to wait until later to collect the money from its customers on its own. However, some companies will factor out their receivables anyway because in the long run it will cost less to hire another company to do the work for them. Not every company has a qualified and experienced collections department. Receivable funding can be worth it for these companies if it would actually cost them more to hire and train employees for collections than simply factoring out.
Receivable funding comes in a few different types. In recourse factoring the factor can return uncollected accounts to the seller in exchange for a reimbursement or other accounts. If the agreement is non-recourse, the factor doesn’t have that option. In confidential factoring, the customers of the seller are not informed that the factor will be receiving their money, and the seller will continue to collect on the receivables. If it is informed factoring, the customers are told about the factor, which makes the collections.
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