Factoring is often referred to as accounts receivable factoring as the finance it provides is directly against the accounts receivables.

Factoring is often referred to as accounts receivable factoring or accounts receivables factoring as the finance provided by factoring is made specifically against the accounts receivables. It can also be referred to as invoice finance or invoice factoring as it is each individual invoice that is assigned to the factoring company.

What are accounts receivables? They are basically the sum of all of the sales invoices not yet paid and are normally recorded in the accounting records of a business by individual customer/debtor. Therefore the total accounts receivables outstanding of a business is the sum of the current unpaid invoices.

Where credit terms are offered these invoices will not all be due for payment for example if a company offers 30 days from date of invoice payment terms to its customers an invoice issued on the 1st of the month becomes due for payment on the 30th.

Accounts receivable factoring will fund all invoices on a recourse period of upto 120 days and the factor will assume the responsibility of chasing the customer for payment as invoices become due. Taking the example above the customer should make payment on the 30th therefore on the following day the invoice is now overdue for payment and it is in the interest of both the supplier and the factoring company that payment is received promptly from the customer/debtor. The longer a debt remains unpaid the greater the risk of it not being paid at all i.e. a bad debt.

It is imperative then when credit terms of trade are offered that each invoice is followed-up as it becomes due either by sending out a statement of account or reminder letters or by contacting the customer direct by telephone or e-mail. Often time constraints on the prime movers of a business and their accounting staff limit their ability to chase promptly and effectively. It can also be difficult sometimes wearing two hats – the friendly entrepreneur trying to win new orders and at the same time firmly requesting settlement in respect of goods or services already supplied. That is where factoring comes in.

Experienced credit control staff will chase all overdue accounts and give advise on the level of credit that should be offered to individual customers. The accounting records in respect of the sales ledger will be maintained keeping a record of the total accounts receivables ongoing. Statements of account will be sent out on a regularly basis and a collection policy agreed with each business factored. On top of all this is the intial payment of upto 90% of the value of each invoice as they arise which can be the making for a growing or developing business allowed them to increase sales in order to maximise the profitability of the business.