Jason Severson and Greg Salomon sat down to answer common questions about business financing and invoice factoring.

Today’s question is: What happens if a company sells its Accounts Receivables (AR) to a factoring company?

First, let’s start with the definition of factoring.

Factoring is when a company sells an invoice to a factoring company. In return, the factoring company gives you the money so you’re not waiting to get paid from your customers.

The technical definition can be intimidating to business owners who haven’t used factoring before. However, if we look at it practically, Accounts Receivable Factoring acts more like a Line of Credit.

As the company, you’re giving a series of invoices to the factoring company, who is financing those invoices. Essentially, it is similar to how a bank would work with a Line of Credit that’s secured by Accounts Receivables.

How Factoring Works

As the business owner or CFO, once you have selected the right factoring company for your business, you would send in a group of invoices to the factoring company, like your AR aging for example. The factoring company gives you money for the invoices, similar to having a Line of Credit.  

You get the money now, so you won’t have to wait for 30, 45, or even 60 days for work you’ve done, or products/services you’ve provided.

Simple. 

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