What is Accounts Receivable Funding?
Accounts receivable financing is another name for factoring. Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.
Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring is not a loan -it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three (the one who sells the receivable, the debtor, and the factor).
The receivable is essentially a financial asset associated with the debtor’s liability to pay money owed to the seller (usually for work performed or goods sold).
The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), to obtain cash. The sale of the receivables essentially transfers ownership of the receivables to the factor. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections.
The seller should never collect the payments made by the account debtor; otherwise the seller could potentially risk further advances from the factor.
There are three principal parts to the factoring transaction; a.) the advance, a percentage of the invoice face value that is paid to the seller upon submission, b.) the reserve, the remainder of the total invoice amount held until the payment by the account debtor is made and c.) the fee, the cost associated with the transaction which is deducted from the reserve prior to it being paid back the seller.
We have a quick and easy approval process that can get you set up in as little as 3 business days. GMA USA does not sign you on to any long-term contracts. Our agreements allow you the flexibility to factor what you want, when you want. You can pick and choose the accounts that you want to factor. Get started immediately by filling out the quick application on the right-hand side of this page or go to our online or downloadable application.