Receivable Factoring

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The mechanics of Account Receivable Factoring Accounts Receivable Financing as a line of credit secured by a companies receivables. For the purposes of this discussion it may be easier to think of AR financing as nothing more than a revolving line of credit. The mechanics of AR Financing A business credit line is established. Generally, the line will be somewhere in the neighborhood to the equivalent of one to two months worth of the companies sales. The credit line allows a business to draw from the line as needed. The draw is limited up to 90% of value of the combined accounts receivable outstanding. Unlike factoring, verification and notification are not an issue, thus your customers will not know that you have a credit facility in place. However, AR financing usually requires that customer payments are sent to a lock box that is controlled by the lender. Remember, unlike factoring the customer is not contacted for verification or notification and checks are written out to the seller. As the accounts receivable payments are received they are applied to the outstanding loan balance to reduce the loan amount that was previously drawn from the line. At the end of each month, an interest rate is paid on the outstanding daily balance of the loan. Interest rates vary widely depending on the bank or finance company. The rates are usually tied to the “Wall Street Journal Prime” lending rate. Normally, rates run between prime plus 3 to prime plus 6, however it is not unusual to see rates as high as prime plus 10 (sometimes even higher). Which is less expensive, AR Financing or Factoring? Without question, AR financing is less expensive than factoring. Remember, with AR financing a company is paying an interest rate against an outstanding loan balance; with factoring a company is paying a discount rate against the face value of the invoice.

Quick Contact Form First Name: Last Name: Company Name: State: Please SelectARIZONAARKANSASCALIFORNIACOLORADOCONNECTICUTDELAWAREFLORIDAGEORGIAHAWAIIIDAHOILLINOISINDIANAIOWAKANSASKENTUCKYLOUISIANAMAINEMARYLANDMASSACHUSETTSMICHIGANMINNESOTAMISSISSIPPIMISSOURIMONTANANEBRASKANEVADANEW HAMPSHIRENEW JERSEYNEW MEXICONEW YORKNORTH CAROLINANORTH DAKOTAOHIOOKLAHOMAOREGONPENNSYLVANIARHODE ISLANDSOUTH CAROLINASOUTH DAKOTATENNESSEETEXASUTAHVERMONTVIRGINIAWASHINGTONWEST VIRGINIAWISCONSINWYOMING Phone: Mobile: E-mail: Outstanding Accounts Receivable Please SelectLess than $5,000$5,001 - $10,000$10,001 - $20,000$20,001 - $30,000$30,001 - $40,000$40,001 - $50,000$50,001 - $60,000$60,001 - $70,000$70,001 - $80,000$80,001 - $90,000$90,001 - $100,000$100,001 - $110,000$110,001 - $120,000$120,001 - $125,000$125,000+ Monthly Sales Volume Please SelectLess than $5,000$5,001 - $10,000$10,001 - $20,000$20,001 - $30,000$30,001 - $40,000$40,001 - $50,000$50,001 - $60,000$60,001 - $70,000$70,001 - $80,000$80,001 - $90,000$90,001 - $100,000$100,001 - $110,000$110,001 - $120,000$120,001 - $125,000$125,000+ Comments:

For a moment let’s pretend that a factor is charging 3% per month and a finance company or bank is charging 3% per month for AR financing. Let’s assume that there is an 80% advance rate from both entities.

Factoring $200,000 at 3% discount would cost the company $6,000 at the end of 30 days.

AR financing would only cost the company $4,800 because they would have been charged an interest rate only against the advance and not the face value of the receivable.

The cost of AR Financing and factoring becomes even more noticeable when you plug into the equitation a more realistic AR interest rate:

It would be nice if every business that needed to factor or finance their accounts receivable could qualify for AR financing. All things considered, AR financing is relatively inexpensive and in many cases, AR financing is not out of line with traditional bank financing or even an SBA loan.

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