Accounts receivable financing is a type of financing arrangement between two companies in which one company either sells or lends its outstanding invoices to another company to receive early payments on their due bills. In this agreement, the financing company gives an amount equal to the reduced value of the unpaid invoices or receivables, in return for a fee.Payments for the Business to business sales are not paid instantly at the time of sale. Payments are often paid as per the time period mutually agreed by both the parties. It could be within 30, 60 or 90 days as per the payment agreement. This means, that the buyer can buy the product without making any payment. After receiving the product, he can make the payment anytime within the time period mentioned in the payment agreement. On the other hand, the seller increases the accounts receivable by the amount of sale and records it under the revenues. Later, when he receives the payment he decreases the accounts receivable and increases cash simultaneously. This is called factoring. The biggest advantage of accounts receivable financing is that it allows the seller to get the cash immediately by selling the receivable to a third party.
Size of the accounts:
The factoring companies that buy the accounts receivable to collect payments from the customers are often interested in buying huge accounts, instead of several small accounts. Therefore, size of the accounts is always a matter of preference for a third party company that buys the accounts receivable from.
Before buying the accounts, the factoring company reviews the creditworthiness of the buyer. To establish credibility, the factoring company reviews the credit history, of the seller and also the time period for it has been conducting the business. Therefore, if the seller company carries a good credit score and has been in the business for quite some time, more it has chances of grabbing attention of the factoring companies.
Factoring companies do not seem much interested in buying the accounts receivable that are beyond the agreed-upon payment date, as such accounts have minimum or no chances of getting paid at all. So, the factoring companies will either offer a bare minimum price for such accounts or in many cases won’t buy them at all. Factoring companies don’t want to indulge in the practice of pursuing the customers for collection of bills; therefore they would like to keep such accounts at bay.