You may have heard the concept of business factoring referred to by many names, including business invoice factoring, invoice financing, and A/R financing. Factoring, or accounts receivable factoring, is the process of selling commercial invoices/accounts receivable at a discount to a buyer (factor). The seller receives immediate working capital in exchange for these invoices, which are usually valued at 25% less than their book value. The factor assumes responsibility for the collection of the debt, and in some cases, will offer the liable party discounts of 2%-5% to pay the account in full.

Factoring companies are usually very well-versed commercial lenders with tremendous experience in risk assessment. In this current economic environment, developing a relationship with the right factoring company can relieve some of the burden associated with A/R collections and cash flow management. Of course, with the increased risks facing commercial lenders in the current marketplace, many factoring companies will be requiring more financial information from a client before entering into a factoring arrangement. Expect any reputable factoring company to complete a credit check on a client before developing a relationship. That being said, once the factor establishes a comfort level with a given client and their accounts, a credit line can then be established for future use.

While there has been an increase in small business factoring in recent years, please keep in mind that A/R factoring should only be used for short-term financing and cash-flow needs. For more long-term financing, especially for the acquisition of capital equipment and fixed assets, consider equipment leasing options and business lines-of-credit.