How to Factor AR Invoices
If you are looking to increase your profit on paper, factoring your AR (Accounts Receivables) invoices is one way to do it with minimal risk. You can transfer your overdue invoices to a factoring company and collect part of the balance up front for a small fee. It is a little kinder to your customers, and can be more profitable than sending these invoices to a collection agency.
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Instructions
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Collect your overdue AR invoices and make sure all the addresses and names are correct and verified.
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Contact a factoring company and learn about their rates, fees and charges (see Resources below).
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Set up a contract to factor your invoices to this company. The company will pay you a percentage of the invoice (usually 80 percent) and then attempt to collect the rest of the payment from your customer. Your customer will receive the same invoice, but with a different payment address.
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Wait until the factoring company collects the entire payment for the invoice. Once they do, collect the remaining 20 percent of the invoice from the factor company minus their fee.
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Send the company more of your overdue invoices and receive your up front payment of 80 percent. Add the money received to your fiscal report under a separate line called "Profits After Factoring".
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Repeat the process until your invoices are paid off.
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Tips & Warnings
Factoring invoices will help you show a larger overall profit and is more effective for some businesses than a collections agency, which will only pay you pennies on the dollar for the right to your debts. Use this tool to increase your cash flow and finance improvements in your business, or when your liquidity is low. Many times rates for factoring are as low as 1.5 percent.
