Accounts Receivable Factoring: The Definitive Guide

Navigating the ebb and flow of business finances, especially for small and medium-sized businesses, can be daunting. A study highlighted by Forbes reveals a staggering finding: 21.7% of businesses will fail within the first year of opening, and that the leading cause of small business failure is poor cash flow management. Cash flow issues not only limit their ability to embrace growth opportunities but also places a massive strain on their day-to-day operations, from fulfilling payroll to settling supplier invoices.

As entrepreneurs, we stand in solidarity with small business owners, as we deeply understand the complexities and pressures of small business financial management. We recognize that behind every pending invoice with long net terms is a hardworking business owner and their team, meticulously strategizing over the allocation of limited capital. Our approach with accounts receivable factoring is straightforward: we provide a practical solution that helps businesses overcome the gap between finishing a job and getting paid for it. It’s designed to bolster businesses, making sure they don’t just get by but actually thrive in today’s competitive market.

Definition of accounts receivable factoring

Accounts receivable factoring is a strategic financing solution where businesses transform their outstanding invoices into immediate cash by partnering with a well-reputed financing company. This method offers an upfront advance on the invoice value, with a transparent factor fee deducted, making it an ideal cash flow management tool for SMBs. Unlike traditional bank financing or lines of credit, this approach unlocks the capital tied up in unpaid invoices, converting pending payments into usable working capital in a matter of days instead of weeks or months. It’s a savvy move for businesses aiming to maintain positive cash flow, manage operational expenses, and fuel growth without the complexities and delays often associated with typical lending options and traditional loans.

How accounts receivable factoring works

With accounts receivable factoring, businesses can usually expect a streamlined and efficient process that speeds up their access to working capital, freeing them from the constraints of traditional payment cycles. Here’s how the process unfolds with FundThrough:

1. Account Setup: With FundThrough, businesses can quickly create an account or integrate their existing accounting software, such as QuickBooks or OpenInvoice. This step is crucial for a smooth start, ensuring all relevant invoice data is readily accessible and organized for funding. (You can still work with us even if you don’t use either of these platforms.)
2. Invoice Selection: Once the account is set up, businesses can select which outstanding invoices they wish to fund. The ability to choose specific invoices for funding provides flexibility and control over the amount of capital a business wants to access. Integration with accounting software simplifies this step, allowing for an automatic sync of invoice data.
3. Funding Approval and Payment: After selecting the invoices, we verify the invoices with the client and then advances the funds (FundThrough advances 100% the value of the invoice, minus a fee) directly to the business’s bank account. This step is often as quickly as the next business day, giving businesses with the much-needed cash to meet their operational needs.
4. Customer Payment and Settlement: The final step in the process occurs when the client pays the invoiced amount according to the agreed net terms to the factoring company. If there is any remaining balance withheld (usually none, as FundThrough typically advances 100% of the invoice minus the factor fee) it’s then transferred to the business who factored the invoice. This concludes the factoring process, allowing the business to move forward with no outstanding obligations.

There may be some nuances depending on the factoring company, but with FundThrough, getting invoices paid early is quick and straightforward.

Ready to explore accounts receivable factoring?