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How AR Factoring Works

How AR Factoring Works

What is AR Financing aka Factoring of Receivables

AR Factoring is for a business selling account receivable to obtain short-term funds, aka a short term business loan. It can also represent long term financing as it can continue on as long as both parties agree and can be provided by a private lender directly or through the SBA. This is done so that the company doesn’t have to deal with the slow, agonizing process of getting a bank loan. The company that once had no funds, now has the finances that they need to launch their business.

So how does accounts receivable factoring (financing) work? The factoring company (the company that bought the accounts receivable) will check the credit of the selling companies CLIENT — not their own credit. As long as they are doing business with clients that have great credit, AR will most definitely be considered.

Businesses that have IRS issues or many other kinds of funding problems, accounts receivable is a wonderful option. The business however must make at minimum, $25,000 per month, in order to qualify for accounts receivable. Now this doesn’t actually mean that the company has to be making this every month, this means that the company could make less, but with accounts receivable, that funding will create a situation where they can bring in just that much or even more, and in turn qualify them for accounts receivable.

When the factoring company buys the invoices, they then handle all the duties of collections, so it’s pretty obvious that you definitely need to keep a great relationship with this company and instead of treating them as a collection agency, they should be treated as a business partner.

With accounts receivable a company is able to purchase anything that is needed for the company such as equipment and many types of materials. Most importantly, payroll needs are met. This is why such companies should be treated as business partners, because when they buy your businesses accounts receivable, they are playing a huge part in your companies upgrade.

Uncollected invoices have actually been purchased and sold throughout the history of business. Truly it is more effective than ever and is an excellent option for all businesses, including oil and gas, medical and so many more.

When a company or business is able to sell its account receivable or unpaid invoices, it secures that companies future and reduces risk of falling apart or collapsing. This is so much safer and risk free than a traditional loan because with a loan, you risk the chance of not being able to pay the agency back, and with that, comes business collapse and debt. Even more relaxing is the idea that with accounts receivable you do not have to worry about putting your assets up for collateral, like you would with a loan.

Go to managing inventory, the other major working capital component in ABL lending.