Accounts receivable financing refers to a type of financing arrangement in which one company sells or lends its outstanding bills to another company to receive timely payments on their due bills. The financing company pays a fee in exchange for an amount equaling the lower value of unpaid invoices. Payments for business to business sales do not occur immediately. Payments are usually made within the agreed time frame. The payment agreement may stipulate that it could take between 30 and 60 days to pay the money. The buyer can purchase the product at no cost. The buyer can pay the amount he has agreed to within the specified time frame after receiving the product. The seller, on the other hand increases his accounts receivable by the sale amount and records it under the revenue. When he gets the payment, he reduces the accounts receivable while simultaneously increasing cash. This is known as factoring. The greatest advantage to accounts receivable funding, is that the seller can get cash immediately by selling the receivables to a third party.
Factoring companies are more interested in purchasing large accounts than small ones. A factoring company will always prefer to purchase large accounts over smaller accounts.
The factoring company checks the creditworthiness before buying accounts. The factoring company checks the credit history of the seller as well as the length of time it has been in business. The factoring companies will pay more attention to sellers who have a strong credit history and are in business for a long time.
Factoring companies are not interested in purchasing accounts receivables that are past the agreed-upon date of payment. These accounts have very low or no chance of being paid. Factoring companies won’t often buy such accounts at all, or they will offer a minimum price. Factoring companies do not want to pursue customers for the collection of bills. Therefore, they wish to keep such accounts away.