What is receivables factoring?
Receivables factoring is when you sell your outstanding receivables to a factoring company.
It is an arrangement of sale and purchase, not lending and borrowing. As the factoring company buys your receivables, it will be responsible for collecting money from your customers too.
Here is how receivables financing works. A factoring company typically pays you 70-90% of the receivables value upfront. The rest is paid at the maturity date of your receivables, after deducting the factor fee and other fees.
Learn more: Receivables Financing: The Ultimate Guide
Following is an example with actual numbers.
Receivables factoring example: how does it work?
- You sold $20,000 of goods to a customer on credit.
- You then sell the receivables to a factoring company at a factor rate of 5%.
- The initial cash advance is 85%, remainder to be paid upon maturity.
The 5% factor rate is essentially a discount paid for early cash flow. It means that in the end, you will only receive 95% of the $20,000, which is $19,000.
In a receivables factoring arrangement, the factoring company is responsible for debt collection.
To minimize the risks of customer default, the factoring company will only give you 85% of the receivables value as an upfront payment, which is $17,000 in this case.
You will collect the remainder, which is $2,000, at the maturity date of your receivables, after the factoring company successfully collects the sum from your customer.
A quick summary of this receivables factoring arrangement is included below:
|
Item |
Calculation |
Amount |
|
(a) Invoice value |
- |
$20,000 |
|
(b) Factor fee (5%) |
5% of (a) |
$1,000 |
|
(c) Total to be received (invoice value after fee) |
(a) − (b) |
$19,000 |
|
(d) Initial advance (85%) |
85% of (c) |
$17,000 |
|
(e) Remaining advance |
(c) − (d) |
$2,000 |
Note: Receivables factoring could be recourse or non-recourse.
In a recourse factoring arrangement, you will have to buy back or replace any non-performing receivable. In a non-recourse factoring arrangement, you will not be responsible for non-paying customers’ debts.
Learn more about recourse vs. non-recourse factoring in our blog article on invoice factoring.
Learn more:
- Receivables Discounting: Things You Need To Know
- E-commerce Financing: Options to Finance Your Online Business
- E-commerce Lending: Loan Options and Alternatives
- 4 Reasons Why E-commerce Companies Should Consider Revenue-Based Financing
About Choco Up
Founded in 2018, Choco Up is the leading revenue-based financing platform in Asia Pacific, offering non-dilutive growth capital to fast-growing companies.
Currently covering more than 10 markets and 10 sectors, Choco Up has helped hundreds of businesses capture growth while protecting equity upside.
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