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Accounts Receivable
Factoring
This is the sale of accounts receivable invoices to a third party who
then assumes the obligation of collecting the invoice. Factors can move
quickly to get funds to a business but are usually the most expensive
way to finance accounts receivable. Most factors initially pay 70% to
90% of the invoice amount followed by an additional payment when they
collect the invoice. Ultimately, factors discount the invoice from 2% to
5% or more. Factors advance funds under one of two conditions: where the
factor assumes all the liability for the invoice (non-recourse) or where
the factor can come back to the business should the invoice become
uncollectible and require reimbursement (recourse).
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