Articles | Accounts Receivable Factoring Outsourcing

Accounts Receivable Factoring Outsourcing


In recent times factoring has gained immense success and is being used by small to midsized companies as a tool for immediate funding needs. The financing companies these days are adding factoring services to their list of services. But collecting payments for outstanding invoices can be a pain for the company. Therefore the process can be outsourced to specialized providers in cash collection services, who would regularly follow up with the debtors for the payment of invoices.


What is 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 is not a loan, it is the purchase of a financial asset (the receivable) involving three parties, i.e. the seller, the debtor, and the factor.


Factoring is a method used by a firm to obtain cash when the available cash balance held by the firm is insufficient to meet current obligations. Eg. XYZ ltd has clients that take up to 45 to 60 days to pay their accounts receivable? Waiting months to get paid for the invoices can create disorder in the company’s cash flow, especially if they have to meet payroll, pay suppliers and pay rent. But what happens if the business can’t wait to get paid because it must meet its obligations?

  One solution to this problem is accounts receivable factoring and it allows the company to turn the slow paying receivables into cash, almost immediately. It works by selling the receivables to a factoring company, who in turn, pays you immediately. This provides the company with the necessary cash flow to meet its immediate requirement.

Accounts receivable factoring is quiet simple. It can be done in three steps:

  • Delivering goods/services as usual to the clients and issue an invoice.
  • Sell the invoice to the factoring company who advances the first installment between 70%-90% of the total invoice.
  • Once the client pays the invoice, the factoring company pays the remaining installment, less a small fee.

Accounts Receivable Factoring is easy to obtain and is an ideal tool for small and medium sized businesses who cannot obtain bank financing but have a solid client base.


The factoring company can in turn outsource the work to outsourcing service providers specializes in cash collection services.


The Process:


The outsourcing company first carries out what can be termed as an image capture. This means that as soon as a purchase order is received, the company scans the purchase order, and then index it based on fields such as customer name, customer number, invoice number and date. This will ensure that all customer data is stored together digitally and is accessible when required.


The next is to scan the POD, or proof of delivery. Here, the customer signature on the document is verified. This serves as a proof that the goods were received and accepted. The next step involves the creation of the invoice statement. Once this is done, the company initiates the process of collecting the money as the due date arrives. All Outsourcing companies focus on maintaining a cordial relationship with the customers, and collecting the money as soon as possible.


In fact, some companies also design customized solutions to implement both inbound and outbound treatment plans to manage the Accounts Receivable based on the customer relationship strategy of the company.


The company then contacts the customer through formal letters or phone calls, and also maintains a record of the same. If, after adequate reminders, the payments do not materialize, the company also prepares statistical reports stating the causes of delinquencies. It also tracks issues like non-payment due to damaged merchandiseBusiness Management Articles, unfulfilled service and pricing discrepancies.

  Accounts Receivable factoring is easy to obtain with minimal paperwork. Decisions are primarily based on the invoicing process and the credit strength of the account debtor (buyer).This financial solution involves very little underwriting. The approval process is simple and can expedite initial funding in 3 to 5 working days.
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