Small Business Factoring Key Terms

Learn more about factoring by mastering some key terminology

Small business factoring has grown rapidly in recent times, since factoring is not a loan but the process of selling of an asset: your accounts receivable, to be specific. Factoring companies buy your receivables and give you cash advances based on their advance rate. When the factoring company gets paid, they then give you the remainder of the cash, minus a fee. This improves your working capital and allows you to pay salaries, buy inventory or whatever else you may need to run your business.

 

Factoring

Factoring means selling your accounts receivable to a factoring company. The factoring company gives you a percentage of the receivables up front, and the balance when your customer pays the invoice or receivable. Factoring is not a loan, and your customers' ability to pay is the basis of your approval.
Try: Crestmark Capital explains factoring in depth, and has a FAQ section on the benefits of factoring, as well as a section that explains the difference between factoring and a bank loan.

Accounts receivable

Accounts receivable is the asset you use to raise money through factoring. Large and medium businesses have used this method of raising money for ages but small businesses have only started using it recently.
Try: United Capital Funding explains how accounts receivable can be used to increase cash flow through factoring.

Factors advance, advance rate and installment

A factors advance, also known as an advance rate or installment, is the amount of money you receive from a factoring company before it collects on your invoices.
Try: The Invoice Factoring Group explains invoice factoring and factors advance in detail.

Reserves and holdbacks

A reserve, also called a holdback, is the amount money you receive from a factoring company after it collects money from your customer, minus its fee.
Try: Rexford Funding explains what a reserve is in much more detail. It also publishes the definitions of many other factoring terms on its site.

Factoring fee

Factoring companies describe factoring fees in terms of percentages, which can range from 1 to 3 percent of your accounts receivable.
Try: First Pacific Capital has in-depth information to help you understand how factoring fees work, with examples.

Working capital

Working capital is the amount of money you have on hand to pay your bills and employees. Sometimes your cash flow may be very little when compared to your accounts receivable. In order to get cash influx into your business, you sell your accounts receivable so you have more cash to work with.
Try: Planware explains the working capital cycle to help you better understand how your accounts receivable play into your working capital.

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