Accounts Receivable Funding

When a business sells to an individual who is the end-user of a product, it is considered a retail transaction.  In a retail transaction, the customer generally has to pay for the product at the time of sale, then walks away with the purchase and a receipt.

When a business sells to other businesses, it's called a commercial transaction.  In commercial transactions, goods typically are sold on credit.  The buyer doesn't have to pay for the product immediately.  In fact, the buyer may have 30, 60, or even 90 days to pay.

The process of transacting accounts receivable in the secondary market is called factoring.  Factoring is the purchase of accounts receivable from a business at a discount.  Factoring allows businesses to collect the money they are owed immediately by accepting a discounted (reduced) amount of the invoice from a third party.

Factoring is not a lending service.  A factor simply buys invoices at a discount and collects a fee.

Many businesses that apply for bank financing, especially small to medium sized companies, are turned down.  Banks must follow very rigid guidelines established by the FDIC.  When evaluating a loan application, banks must consider the amount of assets that a business has to secure a loan.  Those assets are called collateral.  Banks generally require a great deal of collateral to secure a loan for a business.

  Factors, on the other hand, are not subject to the same regulations that banks are.  When a business enters a factoring arrangement, the factor bases the purchase on the credit of the business's customers, not on the credit of the business itself.