Accounts receivable financing is a type of financing agreement between two companies in which one company sells or lends its outstanding invoices to another company to receive advance payments on its overdue invoices. In this arrangement, the financing company provides an amount equal to the reduced value of the unpaid bills or accounts receivable, in exchange for a fee. Payments for business-to-business sales are not paid instantly at the time of sale. Payments are often paid according to the period of time mutually agreed upon by both parties. It could be within 30, 60 or 90 days depending on the payment agreement. This means that the buyer can buy the product without making any payment. After receiving the product, you can make the payment at any time within the period mentioned in the payment agreement. On the other hand, the seller increases accounts receivable by the amount of the sale and records it in income. Later, when he receives payment, he simultaneously decreases accounts receivable and increases cash. This is called factoring. The biggest advantage of accounts receivable financing is that it allows the seller to obtain the cash immediately by selling the account receivable to a third party.
Beads size:
Factoring companies that buy accounts receivable to collect payments from customers are often interested in buying large accounts, rather than several small accounts. Therefore, the size of the accounts is always a matter of preference for a third-party company that purchases the accounts receivable.
Solvency:
Before buying the accounts, the factoring company reviews the creditworthiness of the buyer. To establish credibility, the factoring company reviews the seller’s credit history and also the length of time the seller has been doing business. Therefore, if the selling company has a good credit score and has been in business for quite some time, it has a better chance of drawing the attention of factoring companies.
Age:
Factoring companies do not seem very interested in buying accounts receivable that are past the agreed payment date, as such accounts have little or no chance of receiving payment. Therefore, factoring companies will offer a minimum price for such accounts or, in many cases, will not purchase them at all. Factoring companies do not want to fall into the practice of chasing clients for invoice collection; therefore, they would like to keep those accounts at bay.