What is A/R Funding or Factoring?
								The process of transacting accounts receivable in the secondary market is called factoring. Factoring is the purchase of accounts receivable from a business at a discount. Factoring allows businesses to collect the money they are owed immediately by accepting a discounted (reduced) amount of the invoice from a third party. Widely accepted as an alternative financing source, factoring is used extensively in almost every industry by companies that need immediate cash – either for growth or for survival – and may or may not qualify for traditional loans or grants. With factoring, your invoices for goods or services rendered to your customer can be converted into immediate cash to better manage and expand your business. The process occurs as follows: The factor advances a certain percentage of the invoice amount to the business. The factor also holds a percentage of the invoice amount on paper as a reserve. The factor assumes the right to receive payment on the invoice. The business’s customer submits payment to the factor. The factor rebates the business the reserve amount less the factor’s fee. Types of Factoring The two types of factoring are recourse and non-recourse. Recourse In recourse factoring, the credit risk ultimately stays with the issuing business. If a debtor account does not pay the invoice, the Factor has the right to go back to the issuer for final payment. Usury laws of the state in which the transaction originates govern rates of interest charged to the issuer. Non-Recourse Once the Factor has purchased the receivable, the risk of loss due to an insolvency / bankruptcy on the part of the issuer’s client becomes the risk of the Factor.