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Education
StreetSmartsSM
Accounts receivable factoring
By John Tucker financing used in the country today; customers are
1st Capital Loans LLC usually provided a discount if they pay their invoices in
full before the deadline.
I n my tenure as quarterback of the Street SmartsSM
column, I've focused on various ways in which For example, a builder that provided service for a merchant
merchant level salespeople (MLSs) can rebrand as issues an invoice for, let's say, $10,000 with terms that list
professionals who offer distinct expertise and prod- "5 percent 20, net 30." This represents an invoice due in
ucts tailored to fill specific merchants' needs. Two of the full within 30 days, but if it's paid within 20, a 5 percent
topics I discussed early on were merchant cash advance discount is provided. The outstanding invoice becomes an
and alternative business loan products, which are forms accounts receivable, which is listed on the balance sheet of
of alternative debt financing. the builder as an asset.
This article delves into another type of alternative A/R factoring
financing: accounts receivable (A/R) factoring. Following
is a look at its history and function, as well as strategies To assist with cash flow issues stemming from having to
to lead-in with this solution, which has an over 400 year wait 10 to 120 days to receive full payment, merchants can
old tradition. utilize A/R factoring, which dates back to the 1600s, when
colonists would advance payments on raw materials
The creation of accounts receivables being shipped to and from England.
Many of the nearly 30 million businesses in the United The merchant cash advance (which I discussed in a Street
States have to deal with customers taking anywhere from SmartsSM article titled "The Merchant Cash Advance," The
10 to 120 days to complete full payment after a service has Green Sheet, April 25, 2016, issue 16:04:02) was founded on
been rendered. This practice takes place due to market the principles of A/R factoring, where you have a factoring
pressures and the competitive nature of the industries the company (the purchaser) and a merchant selling his or her
merchants are operating in. balance sheet accounts receivables/invoices (the seller).
The official name for a 10- to 120-day outstanding payment The factoring company buys the receivables off the
is an accounts receivable, which is a claim a business merchant's balance sheet, advances about 70 percent of
holds against a customer, creating an asset on the balance said purchase amount upfront to the merchant to use
sheet of the business based on the value of the receivables for cash flow, then provides the remaining 30 percent at
outstanding. the end. This is after the client(s) have completed their
payment cycle (up to 120 days) minus about a 2 percent
The act of allowing a customer 10 to 120 days to provide discount fee the factoring company uses to make money
payment is known as Net D or what's known as trade from the transaction.
credit. Trade credit is perhaps the biggest source of
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