Mastering Payment Processing: How AR Factoring Can Benefit Your Business

Accounts Receivable Factoring, or AR Factoring, is an essential financial tool for businesses grappling with cash flow challenges and late payments from customers. This method involves selling outstanding invoices to a factoring company, which provides immediate cash flow and assumes the responsibility of collecting payments. For small to mid-sized business owners, understanding how AR Factoring works and its various types can offer a strategic advantage in managing finances and sustaining business growth.

happy business owner in an office, looking at a computer screen displaying graphs of improved cash flow due to AR factoring.

What is Accounts Receivable Factoring?

AR Factoring, also known as invoice factoring or receivable financing, involves a business selling its invoices to a factoring company in exchange for an immediate cash advance. This solution is particularly beneficial for companies needing to free up working capital without waiting for clients to pay within their usual credit terms.

How Factoring Companies Operate

Factoring companies assess the credit risk associated with each invoice and provide an advance rate, typically between 70% and 90% of the invoice’s value. They then take on the task of collecting payments directly from clients, ensuring businesses receive the remainder of the amount after deducting a service fee.

step-by-step process of accounts receivable factoring in a flowchart format

Step-by-Step Factoring Process

  1. Submission of Invoices: Businesses identify and submit unpaid invoices to the factoring company.
  2. Creditworthiness Assessment: The factoring firm evaluates the debtor’s credit status to determine the advance rate.
  3. Cash Advance: The business receives an upfront cash payment based on the agreed percentage of the invoice value.
  4. Invoice Collection: The factoring company handles payment collection from customers.
  5. Final Settlement: After full payment by customers, the business receives the remaining balance minus any factoring fees.

Types of AR Factoring

  • Recourse Factoring: Businesses assume the risk for any unpaid invoices, benefiting from lower fees.
  • Non-recourse Factoring: The factoring company absorbs the credit risk, providing businesses with greater financial security at a higher cost.
  • Maturity Factoring: Businesses receive payment on the invoice’s maturity date, with the factoring company managing the collection process.

Calculating AR Factoring

To calculate the benefits of AR Factoring, consider the total invoice value, the advance rate provided by the factoring company, and the associated factoring fees. This calculation helps businesses understand the initial and final amounts they will receive, aiding in effective financial planning.

Contactless Payment Processing can help with our free email invoicing

To further streamline payment processes, Contactless Payment Processing offers advanced email invoicing solutions. This system not only accelerates the payment cycle, making it faster and easier for business owners and customers alike but also integrates seamlessly with AR factoring services. By automating invoice delivery and providing options for immediate online payments, businesses can reduce administrative overhead, improve cash flow, and enhance customer satisfaction. Our email invoicing solution ensures that payments are secure, quick, and manageable, aligning perfectly with the needs of modern businesses.

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