What is Accounts Receivable Factoring and why would I want to use it for my Business?

By June 23, 2016Blog
Very simply stated, Accounts Receivable Factoring, (AR) is where a third party funding source, the Factor, buys a company’s accounts receivable in exchange for the company receiving immediate cash. From an accounting view, the company has now replaced the current asset known as accounts receivable with cash. There is no effect on the balance sheet other than to re categorize current assets. Factoring does not increase a company’s debt, there is no equity created or given up, there is no mezzanine financing and no intrusive new management. AR financing is done to expedite and improve a company’s cash flow. Factoring is usually done either as recourse or non-recourse factoring. Recourse Factoring means if the Factor is not paid back on the original invoice the Factor purchased, the Factor resells the invoice back to the original seller, (company). In some cases, the Factor may further require a notice of assignment be executed in favor of the Factor in order to notify the marketplace that the Factor has taken a security interest in that invoice and that the invoice is now to be paid by the buyer (debtor) direct to the Factor. Why would I want to consider Factoring? A Company’s needs and access to capital are unique. Clients need funding for a wide range of uses and each company has its own diverse background. Some of the reasons why a company may factor include:
  • Financing current Working Capital Needs
  • Speed to deal – factoring account set up and processing can be faster than traditional funding sources
  • Startup Businesses have limited credit histories and thus, traditional financing options are limited.
  • A business or individual may have had a past credit impairment that prevents them from obtaining more traditional means of funding
  • Business Growth  may outstrip current credit availability
  • Bridge Financing
  • Realization of Supplier Discounts
  • Preparation for High Season or higher volumes
  • Crisis Management
  • Debtor-in-Possession (DIP) Financing may be required
  • Current Federal Tax liens may restrict usual funding sources
Sometimes the first place a company approaches for funding is a financial institution.  For a variety of reasons, a lender may have to deny the request for credit. However, a lender and client should understand that saying "no ……but there is an alternative solution!”  is an option. Using a Factor may still keep the rest of the referring institution’s relationships intact.
  • The referring financial institution can retain other retail, consumer, and private banking relationships because factoring AR proceeds can be returned to the institution via wire or ACH.  The referring party can also still take a first - or second secured position and/or subordinate to the AR factor.
  • The commercial AR Factor acts in many ways as a collateral monitor agent because they collect, account and report on receipts and disbursements. Upon client authorization, this can be reported to the referring institution.
  • AR financing does not have to be that expensive and it can function as an intermediate solution. A financial institution may season and later migrate the commercial prospect to their commercial portfolio.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need

In addition to our business growth and value maximization practice, we at Business Design, LLC direct your attention to our Transportation / Logistics Management programs and our International and Domestic Receivables financing products. These products should be of significate interest to Business owners, Private Equity partners and C Suite officers. Our Web site and welcome your inquiries.


Cliff Duffield: 913 302 6937

Cliff Duffield

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