What Is Accounts Receivable Factoring and Is It Right For Your Business?

What Is Accounts Receivable Factoring and Is It Right For Your Business?

Accounts receivable factoring, also known as AR factoring, receivables factoring, or simply invoice factoring, is a form of business finance that uses outstanding invoices (accounts receivable) as the basis for immediate funding.

What Are Accounts Receivable?

Accounts receivable (AR) is the money owed to your business by customers for goods or services already delivered. On your balance sheet, it appears as a current asset, but it is cash you have not yet received.

For businesses with 30-90 day payment terms, AR can represent a significant portion of total assets that is effectively frozen until invoices are paid.

How Accounts Receivable Factoring Works

AR factoring converts that frozen asset into immediate cash:

1. Invoices are raised against customers and submitted to a factoring company
2. The factor advances 70-90% of the receivable value immediately
3. The factor manages collection from the business's customers
4. When customers pay, the remaining balance (minus fees) is returned to the business

The factoring company essentially buys the receivable, takes on the collection responsibility, and charges a fee for providing the cash early.

AR Factoring vs Accounts Receivable Financing

These terms are sometimes used interchangeably, but there is a distinction:

AR factoring: Invoices are sold to the factor. The factor owns the receivable and collects from customers.

AR financing / invoice discounting: Invoices are used as security for a loan or credit facility. The business retains the receivable and continues to collect from customers.

Both provide cash against outstanding invoices. The key difference is who manages collections and owns the receivable.

Is AR Factoring Right for Your Business?

Consider AR factoring if:

• You have consistent B2B invoicing with creditworthy customers
• You are comfortable with customers being notified about the factoring arrangement
• You want to outsource the collections function
• Your volume of invoicing justifies the ongoing administration

Consider alternatives if:

• You want to keep financing arrangements confidential from customers
• You want to choose specific invoices rather than committing your whole ledger
• You need funds the same day rather than days
• You want flexibility without long-term contracts

The FundTap Approach to AR Funding

FundTap provides the core benefit of accounts receivable factoring, access to cash from outstanding invoices, with key differences: selective use (choose specific invoices), no customer notification, no whole-ledger commitment, and funds available the same day through integration with Xero, MYOB, or QuickBooks.

For businesses that want the liquidity benefit of AR factoring with more control and less disruption, this model is worth comparing.

Frequently Asked Questions