If you run a business, you are likely aware of something called Accounts Receivable. This is representative of the money that is owed to your company, by those that have purchased products and services from you, that have not yet paid. This is of course different from accounts payable which is representative of how much money you actually owe people for wholesale products that you have purchased. It could also be representative of the amount of credit that you have used up, essentially money that you owe other businesses, that you have not yet paid back. In regard to accounts receivable, there is a specific area called factoring where a business will actually sell their accounts receivable to another company. It is always done at a discount, making it much more attractive to the third-party that is making the purchase, allowing you to receive a small lump sum of money and redirect that responsibility to another company for recovering the money that is actually owed.
Understanding Accounts Receivable Factoring
Let’s say that you have a business in which you have provided credit for many of the companies that you are associated with that buy products from you on a regular basis. If it has been several weeks or months since they have made a payment, and the account is overdue, you may not want to deal with going to court or trying to recover this money that is owed to you. Although this may seem similar to invoice discounting, these are not the same. Factoring is all about the sale of receivables, whereas invoice discounting usually involves receivable assets that are related to collateral for a loan.
With And Without Recourse
Another term that is very common to factoring is in regard to what is called recourse. Transfers of receivables that do not have recourse are simply the losses that the other business will sustain when purchasing these receivables from you. The transfer of losses is known up front, and those that have recourse are usually substantial, motivating the other party to make the purchase. Again, when you sell these, you are not going to recover very much money, but at least you won’t have to worry about whether or not factor receivable with recourse options are recoverable, or if they will also become losses as well.
If you are currently running a business and you would like to not deal with trying to recover money that is owed to your company, you should certainly consider selling this problem to some other business which is where accounts receivable factoring comes in area it’s really a win-win situation for both parties because it will provide you with relief from the situation, giving you more time to focus on running your company. The other business, especially those that are highly trained at recovering assets that are owed, will be able to make a substantial profit.