A business factoring account is a business deal between a company with accounts receivable and a financing or factoring firm. Accounts receivable factoring is a type of financing in which a company sells its accounts receivable or invoice to a factoring firm for a portion of the accounts receivables’ face value. The company that buys the accounts receivable is called the factor.
After a company has sold its accounts receivable or invoice, it gets immediate payment for it, rather than wait for its customers to pay for the entire invoice. Ownership of the invoice is now given to the factor. After the invoice is paid by the customer, it is deposited into an account wherein the factor can withdraw funds. Business factoring companies typically pay from 75 percent to 85 percent of the face value of the accounts receivable.
The account that the company has set up with the factor is still in effect until the business no longer requires instant cash flow. Business factoring is costly, but it offers the business with instant cash flow when required or in the face of financial problems. Without business factoring, lots of companies would be in financial ruin or go bankrupt. The rapid cash flow enables companies to pay monthly bills, payroll, and purchase materials.
In a number of cases, a factor will refund a percentage of the service charge back to the company if the invoice is paid at the appointed time. If the customer sticks to the terms, the company will get a timely additional benefit. For instance, the factor paid 85 percent of the face value of the account straightforward. However, the customer paid invoice earlier, so the factor immediately refunds 5 percent from the original service charge to the company.