Accounts Receivable Factoring for Dummies
Common Terms & Definitions
I am always asked who is accounts receivable factoring for, what does it mean, who are the companies involved, what do the words recourse and non recourse mean.
So after having received countless emails on this topic, I have put together this brief Accounts Receivable Factoring for Dummies guide.
It defines some key terms involved in the industry.
Hopefully you will no longer be foreign to the terms after reading this brief list.
Factoring – selling of a business’ accounts receivable in exchange for immediate cash payment although at a slightly discounted rate.
Cash Flow – the physical cash available. Cash flow varies from one period to another based on business performance, therefore important to forecast, track and monitor. Most borrowing decisions are based on cash flow (availability of cash on hand).
Discount Rate – the percentage the accounts receivable factoring company charges a business for invoice factoring (typically 1%-5%)
Discount Fee – discount rate times the invoice value. This is the fee accounts receivable factoring companies charge for their services. It is based on the number of invoices and the total amount.
Advance Amount – the amount the accounts receivable factoring company pays the business up front in exchange for rights to the receivable.
Is accounts receivable factoring the right solution for your business? I hope you benefited from the Accounts Receivable Factoring for Dummies guide.
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