If you have been wondering if accounts receivable factoring was right for your business, working through a simple accounts receivable factoring example can help you decide.
Most businesses will use factoring to address short-term cash flow gaps caused by the time delay between invoicing and payment from the customer. In order to qualify, a business must:
- Be engaged in B2B or B2G (business to government) work
- Have accounts receivable that are not overdue
- Have customers that are credit worthy
- Have a mixture of accounts receivables to sell
Approval is typically completed within 24 hours and requires only basic information. At that time, you will receive a full quote for your factoring which includes the rate and fees the factor will charge.
Once you accept, the factor will typically fund up to 80% or more of the accounts receivable within days. They will hold 20% and, once the customer pays in full, the factor deducts the fees from this amount and provides you with the balance.
An Accounts Receivable Factoring Example
A business has $100,000 in accounts receivables due in 60 days. The business has a chance to take on a new contract, but requires substantial investment in materials and equipment to complete the new job.
The business owner goes to the factor and sells the $100,000 in accounts receivables. The factor advances your business $80,000 (80%), which allows you to buy materials and to rent additional equipment to take on the new project. Additionally, by paying off the supplier immediately, you earn back 5% on the purchase, which offsets some of the cost of the factoring service.
Within the 60 days, your customers pay the $100,000 to the factor. The factor deducts the agreed upon fee of 3% or $3000 from the $20,000 and forwards the balance of the reserve or $17,000.
This accounts receivable factoring example can apply to any type of business. This is a very short process, providing you the cash you need when you need it.