Accounts Receivable Factoring 101

Admin — Sat, 12 Nov 2011 14:51:44 +0000

Accounts receivable factoring has been around for a long time, but only in the past few years has it been available to smaller businesses. Therefore, a whole new generation of accounts receivable factoring companies have sprung up to serve the needs of small and medium-sized businesses who want access to receivables quickly.

Accounts receivable factoring is also called accounts receivable discounted. This term comes from the practice of discounting the receivables when selling them to a third party. The accounts receivables are discounted because there is risk involved in purchasing them…the possibility that whoever owes that money many never pay.

Companies that specialize in accounts receivable factoring (purchasing accounts receivable at a discount) are called factors and they used to only serve large businesses. Typically, the factor has no recourse after purchasing any accounts receivable (AR), which means if the bills they bought aren’t paid, they have to absorb that loss. In other words, factors take on full responsibility in the process of accounts receivable factoring.

The nature of accounts receivable discounted has transformed over the years and more businesses are served by factors.