Working Through An Account Receivable Factoring Example

by | Feb 6, 2017 | Financial Services

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.

The Process

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.

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