AR factoring is as old as any other type of business funding. The ideas behind AR factoring are not new. And interestingly enough, as our financial system became more and more complex, AR factoring, or invoice factoring, has remained largely the same.
It is really not hard to understand the ideas behind AR factoring. A business provides a good or service, and according to the customs of its particular industry, issues an invoice. The invoice is usually payable within a fixed period of time. The standard time frames that you'll commonly see for most invoices is between 30 days, which is relatively normal, and 90 days, which is extremely nice. 60 and 90 day invoices are rare, which is because it's like getting an interest free loan for that period of time. People don't give out free loans for the same reason that banks don't. Money has time-value, and you can't give out loans interest free.
Here we go for those of you who would like to learn more about AR factoring. You provided a product or service to one of your clients and instead of demanding payment from them immediately, you simply sent them an invoice. Let's say that it's for $10,000. But the problem is that you don't want to wait 30, 60 or 90 days, whatever the invoice term is, to get paid. It puts a strain on your cash-flow and it hinders you from accepting or completing other jobs that could be generating revenue for you. These types of scenarios are great examples of why AR factoring is so popular.
If you want to get paid upfront without asking your customer for early payment, you'll need the help of an AR factoring company, who'll pay you for the invoice at a discount. For a small discount, you get your money upfront. Plus as an added bonus, you don't have to deal with collecting on your invoice down the line. Longer invoices cost more to factor. 30 day invoices will cost significantly less to factor than a 90 day invoice, but that makes a lot of sense when you think about it. If you don't want to pay the discount, or you're not willing to accept less than the full value of the invoice, then you're probably out of luck. You'll have to try to borrow the money, which is going to come with interest charges of its own.
When it comes to risk factors, your credit is not a major consideration at all. This is because once they've factored your invoice, the only risk of not getting paid back comes from your customers who hold the invoice. For this reason people who do not have great credit consider this type of funding to be particularly helpful.
It is really not hard to understand the ideas behind AR factoring. A business provides a good or service, and according to the customs of its particular industry, issues an invoice. The invoice is usually payable within a fixed period of time. The standard time frames that you'll commonly see for most invoices is between 30 days, which is relatively normal, and 90 days, which is extremely nice. 60 and 90 day invoices are rare, which is because it's like getting an interest free loan for that period of time. People don't give out free loans for the same reason that banks don't. Money has time-value, and you can't give out loans interest free.
Here we go for those of you who would like to learn more about AR factoring. You provided a product or service to one of your clients and instead of demanding payment from them immediately, you simply sent them an invoice. Let's say that it's for $10,000. But the problem is that you don't want to wait 30, 60 or 90 days, whatever the invoice term is, to get paid. It puts a strain on your cash-flow and it hinders you from accepting or completing other jobs that could be generating revenue for you. These types of scenarios are great examples of why AR factoring is so popular.
If you want to get paid upfront without asking your customer for early payment, you'll need the help of an AR factoring company, who'll pay you for the invoice at a discount. For a small discount, you get your money upfront. Plus as an added bonus, you don't have to deal with collecting on your invoice down the line. Longer invoices cost more to factor. 30 day invoices will cost significantly less to factor than a 90 day invoice, but that makes a lot of sense when you think about it. If you don't want to pay the discount, or you're not willing to accept less than the full value of the invoice, then you're probably out of luck. You'll have to try to borrow the money, which is going to come with interest charges of its own.
When it comes to risk factors, your credit is not a major consideration at all. This is because once they've factored your invoice, the only risk of not getting paid back comes from your customers who hold the invoice. For this reason people who do not have great credit consider this type of funding to be particularly helpful.
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