What is 'Accounts Receivable Financing'

Accounts-receivable financing is a type of asset-financing arrangement in which a company uses its receivables — outstanding invoices or money owed by customers — to receive financing. The company receives an amount that is equal to a reduced value of the receivables pledged. The receivables' age largely impacts the amount of financing the company receives.

This type of financing helps companies free up capital that is stuck in unpaid debts. Accounts-receivable financing also transfers the default risk associated with the accounts receivables to the financing company.

BREAKING DOWN 'Accounts Receivable Financing'

Accounts receivables financing companies typically advance companies 70 to 90 percent of the value of their outstanding invoices. The factoring company collects the debts and pays the original company any remaining amount beyond the financing amount minus a factoring fee.

How Factoring Companies Price Accounts Receivables

Factoring companies take several elements into account when determining how much to offer a company in exchange for its accounts receivables. In most cases, accounts receivables owed by large companies or corporations are more valuable than invoices owed by small companies or individuals. Similarly, new invoices are more valuable than old invoices. Generally, the easier the factoring company feels a bill is to collect, the more valuable it is, and the harder a bill is to collect, the less it is worth.

Helping Companies With Accounts-Receivable Financing

This type of asset-based financing allows companies to get instant access to working capital without jumping through the hoops or dealing with the long waits associated with getting a business loan. When a business leverages its accounts receivables to boost its cash flow, it also doesn't have to worry about repayment schedules. Instead of focusing on trying to collect bills, it can focus on other core aspects of its business.

In addition to providing a unique financing option for businesses, factoring companies also offer other services. These accounting-centered services include running credit checks on new clients and generating financial reports.

Negative Perceptions Associated With Factoring

Although factoring offers a number of diverse advantages, it sometimes carries negative connotations. In particular, financing through factoring companies typically costs more than financing through traditional lenders. As a result, businesses that turn to factoring companies are sometimes perceived as having poor credit or to failing financially. However, industry analysts claim these misgivings are not founded on reality, and they state all manner of upwardly mobile, successful companies use accounts-receivables financing when needed.

RELATED TERMS
  1. Factor

    A factor is a financial intermediary that purchases receivables ...
  2. Accounts Receivable - AR

    Accounts receivable is the balance of money due to a firm for ...
  3. Invoice

    An invoice is a commercial document that itemizes a transaction ...
  4. Accounts Receivable (A/R) Discounted

    Accounts receivable discounted refers to outstanding invoices ...
  5. Equity Financing

    If a company needs capital to support its growth, it might seek ...
  6. Finance

    Finance is a term for matters regarding the management, creation, ...
Related Articles
  1. Small Business

    Small Business: Speed Up Receivables To Avoid A Cash Crunch

    Waiting for customers to pay can be a losing game. Look to factoring for quicker cash.
  2. Small Business

    Is Equity Financing the Right Choice for Your Business?

    Discover the benefits and drawbacks of equity financing for a small business, and learn when equity financing should be used instead of debt financing.
  3. Investing

    The difference between finance and economics

    Learn the differences between these closely related disciplines and how they inform and influence each other.
  4. Investing

    Accounts Receivable

    Accounts Receivable (A/R) is an accounting term used to refer to the money that is owed to a company by its customers.
  5. Personal Finance

    Investment banking versus corporate finance

    Read an in-depth comparison of a career in investment banking and a career in corporate finance – and get advice about which one to choose.
  6. Small Business

    How Small Business Owners Can Create Cash Flow

    Without proper cash flow a business can fail.
  7. Investing

    Watch for trends in average collection period

    Discover why average collection period can be a particularly important accounting ratio to watch for a company that relies heavily on credit sales.
  8. Small Business

    7 Unusual Ways Businesses Can Borrow Money

    More and more alternative lenders have emerged for business owners. But beware: Some offer better terms than others.
  9. Investing

    Yahoo! Finance versus Google Finance: Which should you use?

    Thanks to sites like Yahoo Finance and Google Finance, millions of investors are able to analyze markets on their own.
RELATED FAQS
  1. How should investors interpret accounts receivable information on a company's balance ...

    Analyze accounts receivable information on a company's balance sheet carefully. Receivables offer confidence of future cash ... Read Answer >>
  2. How long can accounts receivable be outstanding?

    Learn about a company's accounts receivable, including how long it can remain outstanding, and how their payment or lack ... Read Answer >>
  3. In which industries is Average Collection Period most important?

    Find out which industries are most concerned with average collection period, and how different types of companies interact ... Read Answer >>
  4. How can a creditor improve its Average Collection Period?

    Read about some of the ways that a business can improve its accounts receivable management practices to shorten its average ... Read Answer >>
  5. How is cash flow affected by the average collection period?

    See how reducing a company's average collection period can help cash flow, and learn why collections practices are so important ... Read Answer >>
  6. Does Advertisers provide good financing?

    Making use of seller financing means that you're buying on credit. The seller is essentially loaning you the funds to buy ... Read Answer >>
Trading Center