The Best Accounts Receivable Factoring Company
Accounts receivable factoring companies are also referred to as a Factor. They exist to buy the invoices or accounts receivables owned by small businesses and in exchange provides them with the cash they need to sustain working capital needs or to expand and growth (i.e. open more locations or procure more inventory).
Accounts receivable factoring is the practice of factoring or buying/selling invoices and receivables in exchange for cash. When the transaction occurs, the accounts receivable factoring company takes a small percentage of the receivable as its fee, often called the discount fee.
The accounts receivable factoring company charges a discount fee, in addition to a relationship set up fee that is a one time charge initially. This is done because the accounts receivable factoring company spends a considerable amount of time understanding the small business’ model and its customer risk. The accounts receivable factoring company assumes all the risk by buying the invoices, therefore it charges a small fee as the risk premium.
Invoice factoring companies normally have very good collection staff within because they are responsible for collecting the receivables and invoices they buy once they get it from the small businesses. Think about it, if the accounts receivable factoring company does not collect then it is them who lose out because they have already spent the cash buying the receivables.
Because accounts receivable factoring companies have such a good collection practice within their company, many small businesses recognize this and therefore choose to use accounts receivable factoring companies as third party bill collectors. They consider the small fee a payment for the bill collection services. Of course this only makes sense if the fees are reasonable.
Here is how. Small businesses can do away without an accounts receivable manager because the accounts receivable factoring company is now collecting the bills. In addition, small businesses also relieve themselves of the risk exposure related to a potential customer default on the receivable. Hope that was a helpful run down of what factoring companies do.