Financing Receivables with Accounts Receivable Factoring

To remain successful, organizations need a reliable source of money to lean on when they need a quick influx of cash. One way to do this is through Accounts Receivable Factoring. This form of financial management can help keep your business operating smoothly and help you to raise instant cash for your workplace needs. We’ve compiled everything you need to know about Accounts Receivable Factoring for you to make an informed financial decision. 

What Is Accounts Receivable Factoring?

Accounts Receivable Factoring allows you to receive payment for completed work or services immediately, rather than waiting for customer payment to be received. One of the oldest types of commercial financing — it involves the selling of accounts receivables, or outstanding invoices, at a reduced or marked down price to a factoring or financing company. 

This accounts receivable lender, or factoring company, assumes the risk on your outstanding receivable, and in return, grants you an influx of cash to be used for your business goals. Funding for Accounts Receivable Factoring takes place in two ways — by lending or purchasing your businesss’ outstanding invoices and providing a swift influx of cash to your company. 

Common Types of Factoring Agreements

While each factoring agreement can vary in both style and terms, a few are commonly used in business. Fundamental distinctions can be made based on the contract length. Some factoring agreements are made for short-term objectives, and other agreements dragging on for an extended period of time. Aside from the length of time, there are two main types of factoring:

There are two main types of factoring:

  • Recourse Factoring — with this style, you are responsible for completing the factoring company’s full payment if your customer does not fulfill the invoice. This is the most commonly used type of factoring.
  • Non-Recourse Factoring — in contrast to the above, this type of factoring does not hold you liable for the invoice’s full payment if your customer does not complete the transaction.

The Key Elements of Factoring

You’ve done some research and determined that factoring is a solid option for your business. What comes next? Before you enter into any agreements, you need to make sure you are well-versed on the following elements: 

Know Your Needs and Your Partners. 

Your business needs will determine which kind of factoring is best for your situation. Is your company in the middle of seasonal hiring? In this case, short-term factoring might be best. The quick influx of cash could help you to keep your business during the offseason. Are you looking to expand your company and reduce some costs leading up to it? There are some options for financing or smaller businesses that can help you reach your goals. 

Simply put, before you can enter into any agreement, you need to know what your goals and objectives are. Additionally, it is important to do your research on your potential partners. Ensure the people you do business with are trustworthy and reliable so you can get your cash without any extra struggles. Be sure to only work with people who have a reputable background and credit score.

Master the Terms and Conditions. 

When it comes to accounts receivable factoring and financial agreements, you don’t want there to be any confusion. Make sure you understand all the terminology being used to be confident in what you agree upon. Are all the fees expressly listed? What are the contract limits set by the factoring company? Here are some key terms you should know before you make any agreements:

  • Contract Limit — Set by the company’s funding requirements and the factor’s ability to make the payment.
  • Term of Contract — The length of time of the contract, namely short or long term.
  • Advance Rate — One of the most critical elements of the agreement. This is the fixed percentage of the claim amount that a company receives from the factor. These usually range from 85-90%.
  • Payment Deadline — Set by the urgency of the requirement of funds by the company.
  • Percentage of Fees or Commission — A fixed percentage of the company’s claim amount for providing factoring services.
  • Guarantee — A clause to protect both parties from the risk of fraud. 

Benefits of Accounts Receivable Factoring

In many cases, Accounts Receivable Factoring can be a strategically beneficial move for your company. One thing you might notice is that without the worry over cash flow, you’ll lower the levels of stress you feel in your role. Some other key benefits of factoring include:

Get Your Money Sooner

It’s your money, and you want it now. Accounts Receivable Factoring enables you to do just that. With invoices, you traditionally have to wait a period of time before receiving payment. This length of time can range, with most invoices being a 30, 60, or 90-day timespan. With factoring, you can receive cash instantly, giving you flexibility in your supply chain. Plus, unlike with traditional bank loans, factoring doesn’t require you to sign over assets as collateral — instead, your accounts receivables fill that role. 

Great For Growth

Since Accounts Receivable Factoring gives companies access to instant cash flow, it is a great opportunity for small businesses to grow their organization. Businesses can get access to funding for department projects or hiring needs, with cash availability growing at scale alongside their company. Factoring helps to provide predictable working capital for businesses, creating a more resilient business function in times of disruption. This, in turn, leads to a more streamlined payables cycle, often resulting in early payment discounts. 

Disadvantages of Accounts Receivable Factoring

While the lure of instant cash might be too good to resist, it is important to understand the drawbacks organizations might face when factoring in their accounts receivables. 

High-Interest Rates

With Accounts Receivable Factoring, you will often face higher interest rates. These rates can vary from 1% for 30 days to upwards of 4%, reducing the amount of capital your company receives from the account. It is important to note that the actual cost of factoring is not just the advance rate. It is the total cost of the service. One way to look at factoring is to think of it as using a Payday Loan service. While you do get access to your money sooner, it comes at a cost to your capital. 

Something to note: when you initially sign an agreement, the factoring company reaches out to your customer, informing them of the transaction. Make sure to communicate with your customer throughout the process to dispel any misunderstandings. 

Time-Consuming. 

Changing the contact information and payee information in systems can be very time-consuming and tedious. Every time you want an advance, you need to submit information about your schedule of accounts, invoices, and other required documentation. 

Plus, with the length of each agreement varying, contracts can quickly become lengthy. In a process like this, there are many opportunities for human error that can cause delays in the system. 

Tradeshift Cash Versus Accounts Receivable Factoring

How does Tradeshift Cash stack up with traditional accounts receivable factoring? Let’s start by emphasizing how they’re similar: Both will pay on funded invoices early, so that a business has cash flow when needed.  But Tradeshift Cash uses network technology and a data-driven approach to determining the rate of financing. And that makes all the difference. Because of that, we stand out for our:

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Seamless Experience.

Tradeshift Cash provides a seamless and user-friendly interface for buyers and sellers to facilitate payment processes. You don’t need to provide mountains of paperwork or undergo countless checks like you would with a traditional bank loan. You just need to sign up, see if Tradeshift Cash is a good fit for you, and start getting paid. Our digital platform reduces the need for paperwork, creating an organized and efficient process for all parties involved. The simple enrollment process for Tradeshift Cash lets you get on your way in just a few clicks. 

With Tradeshift, you get access to transformational tools like e invoicing and the ability to promote your products and services to new buyers. Plus, once you’re on the network, you stay on the network and can keep all the value you get from it. Sellers don’t have to rely on their buyers for underwriting — Tradeshift Cash uses  real-time and historical transaction data instead. 

Tradeshift Cash Versus Accounts Receivable Factoring

How does Tradeshift Cash stack up with traditional accounts receivable factoring? Let’s start by emphasizing how they’re similar: Both will pay on funded invoices early, so that a business has cash flow when needed.  But Tradeshift Cash uses network technology and a data-driven approach to determining the rate of financing. And that makes all the difference. Because of that, we stand out for our:

Illustrative icon

Seamless Experience.

Tradeshift Cash provides a seamless and user-friendly interface for buyers and sellers to facilitate payment processes. You don’t need to provide mountains of paperwork or undergo countless checks like you would with a traditional bank loan. You just need to sign up, see if Tradeshift Cash is a good fit for you, and start getting paid. Our digital platform reduces the need for paperwork, creating an organized and efficient process for all parties involved. The simple enrollment process for Tradeshift Cash lets you get on your way in just a few clicks. 

With Tradeshift, you get access to transformational tools like e invoicing and the ability to promote your products and services to new buyers. Plus, once you’re on the network, you stay on the network and can keep all the value you get from it. Sellers don’t have to rely on their buyers for underwriting — Tradeshift Cash uses  real-time and historical transaction data instead. 

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Cost-Effective and Secure. 

With Tradeshift, you can get paid faster and less expensively than other standard loan and early payment solutions. We base our financing rates on your transaction and credit history, putting you in control of your rate. Unlike most accounts receivable factoring, Tradeshift Cash not only gives you power over when you get paid  but also more control over how much you get paid. Our network funding looks at the strength of the relationship between you and your buyer bases the cost of financing off of that. This means if you have a strong relationship with your buyer, you can get paid quickly and cost effectively, regardless of the terms of your invoice. 

Tradeshift is changing the game when it comes to securing early payments for your business. Our Cash solution enables businesses to control their cash flow, giving them added resiliency and adaptability when future disruption occurs. To learn more about how we can help you make Shift happen in your organization, check out our full menu of products.

Do you want to get started with transforming your supply chain? Reach out to our team of experts and schedule a consult today

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