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Your roadmap to accounts receivable factoring


Are you a business owner that would like to enhance your cash flow and accelerate growth? If so, accounts receivable factoring could be the answer.

In this comprehensive guide, we will cover what accounts receivable factoring is, how it works and the benefits of factoring versus traditional financial facilities. We’ll share valuable tips on how to choose the best factoring company and discuss the eligibility criteria required to qualify for factoring receivables.

Get ready to take your business to new heights with this roadmap to accounts receivable factoring…


What is accounts receivable factoring?

Accounts receivable factoring is when a company sells its unpaid invoices to a third-party at a discounted rate. The third-party, known as the factor, provides immediate cash to the company and then collects the outstanding payments from customers.

This can therefore be a beneficial option for companies that need to improve their cash flow and obtain working capital, especially in industries with long payment cycles and/or seasonality.


Why do companies factor receivables?

By eliminating the wait for customer payments, businesses that factor their accounts receivable gain immediate access to the outstanding cash.

Not only does this enable business leaders to focus on core operations, rather than worrying about customers making payment, the injection of capital means the business can invest in growth initiatives sooner.


Types of receivables factoring:

Spot vs regular factoring

Spot factoring enables businesses to convert a single outstanding invoice into immediate cash. This type of financing is particularly beneficial for companies in need of quick access to funds for specific expenses or where a business receives a one-off order of significant value, particularly if the business needs the additional capital to service the order.

Regular factoring, which can also be referred to as invoice finance, enables businesses to sell multiple invoices on an ongoing basis, ensuring a steady source of working capital.

Deciding between spot and regular factoring hinges on a company’s unique requirements and circumstances, with the former catering to immediate funding needs and the latter providing more consistent cash flow.

Recourse vs non-recourse factoring

With recourse factoring, the business is responsible for repurchasing any invoices that are not paid by customers, while non-recourse factoring shifts the risk of non-payment onto the factoring company.

Non-recourse factoring can be a more expensive option, given the increased risk exposure to the lender, so businesses will need to weigh up the creditworthiness of customers and the business’s own risk tolerance to decide whether paying more for non-recourse factoring is worth it.

Notification vs non-notification factoring

As the name might suggest, with notification factoring, the end customer is informed about the business’s decision to use factoring services.

In contrast, non-notification factoring (also known as confidential invoice finance) maintains the factoring arrangement without notifying the customer. This type of factoring enables businesses to keep control over their customer relationships and collections process, ensuring confidentiality and continued management of customer interactions.

The choice between notification and non-notification factoring depends on various factors, including business goals, customer relationships and industry norms.

Benefits of factoring versus traditional bank loans

When applying for a traditional bank loan, lenders will take a rigorous approach to both the business and its credit history, so it can assess the business’s risk profile accordingly. This can make it difficult for earlier stage businesses to raise funds, as well as those with fluctuating or seasonal incomes.

In comparison, factoring leverages a business’s outstanding invoices to raise funds, meaning the lender is more interested in the quality of a business’s debtors.

The lender is then repaid when the customer pays the invoice, so factoring also removes the need for a business to manage a monthly repayment schedule as it would with a conventional loan. Many business leaders feel nervous about what they perceive as “getting into debt”, so factoring can enable them to access capital without the burden of this element.


How to choose the best accounts receivable factoring company

The best place to start is by considering why you actually want to raise capital. Is it simply to smooth cash flow? Or do you have more ambitious growth plans in mind? This will influence the amount of cash you need to raise, as well as the type of lender that will be best suited to your needs.

Looking for a company with specific industry experience and positive testimonials from existing clients is also a good move – you want to work with a lender that understands your sector and has other clients that operates within it.

Then it comes down to the terms a lender can offer you – what fees do their facilities entail? How long is their minimum contract? Will you need to pay a fee whether or not you use their facility? Are there any additional benefits such as credit checks or bad debt protection?

If you’re not sure, initiate a conversation with a lender (or even a few of them). You’ll soon get a feel for the type of businesses they are interested in and how they’d be able to support your specific needs.


How to qualify for factoring receivables

Each factoring company will have their own set of eligibility criteria, so this will vary depending on who you’re speaking to.

There are however, some general factors that most lenders will consider:

  • Creditworthiness of your customers
  • Concentration of your customer base
  • Age of your invoices

A strong customer base with a good credit history can increase your chances of approval and having a consistent flow of outstanding invoices, with no past due payments, also works in your favor.


A game-changer for growth

Accounts receivable factoring can be a game-changer for your business. It provides a quick and reliable solution to improve cash flow and access working capital, without taking on additional debt or giving up equity. Whether you need funds to support growth, manage seasonal fluctuations, or cover day-to-day expenses, factoring receivables can help to achieve these goals.

Still unsure whether factoring is for you? Book a chat with one of our lending experts, who will be more than happy to help. Or, apply through our website for a fast indication of how we can support you.