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Account receivables factoring gives a business the option to secure immediate capital which can be used to cover regular expenses such as inventory, payroll, or utility expenses. Many businesses have cash flow issues at some point, so being able to get capital quickly can be extremely important for a business. By selling off accounts receivables or invoices to a factor a business obtains money.

The factor, or business that purchases account receivables for a discount, will collect all payments from the clients, and they will even process the payments as well. The business won’t have to worry about getting the money from the client, as the factor does that. There is unlimited capital potential because the amount of capital available goes up as your sales and accounts receivables increase.

The factor company will pay you in advance, and generally they will give you 70%-90% of the total invoice up front. They then take a small fee for their services starting at 2%. After the fee is taken they give you the remaining difference. For example if you have an invoice worth $10,000 you would sell it to a factor and they would give you 70% up front. So you would get $7,000 up front. They may charge a fee of 5% for their services, so they would take $500 as their cut, and they would pay you the remaining balance of $2,500 after the money has been collected from the client.

Account receivables factoring makes for a win-win situation for all parties involved because you get your capital quickly without having to worry about not getting paid from the client, and the factor makes money by taking their fee.

The best part of this whole process is that it is very simple for a business to get approved because the creditworthiness of the client is used to determine eligibility. The factor wants to make sure they get paid since they are taking on the risk.

Other benefits to this sort of financing is that your business has peace of mind, they can take advantage of specials on inventory, take advantage of early payment discounts, and so forth. The owner also doesn’t have to give up ownership like if they went after investment capital to stay afloat during the beginning months.

There are many other options for financing a start-up business, but if your business is lacking collateral or if your business does not have business credit scores established obtaining funding in those ways can be extremely difficult.