Continuing our lesson on working capital financing terminology, this blog post will explain the term “accounts receivable factoring” as well as the concepts behind it.

Accounts receivable factoring takes place when a factoring company purchases a company’s invoices and in turn provides the company with working capital. Here’s an example using a fictitious company that we will call ABC Staffing Company.

Let’s say that ABC Staffing sends temporary employees (temps) to various companies in their operating area, and that they operate on a basic 30-day invoicing program. If ABC needs additional capital / cash flow to cover certain operating expenses (like paying the temps), they can assign their invoices to an accounts receivable factoring company in exchange for cash flow. This will help them cover their day-to-day operational costs, like paying those temps.

The company’s who owe ABC Staffing would then send their payments to the accounts receivable factoring company (instead of sending them directly to ABC Staffing).

Note: If you learn better with the help of visual aids, diagrams and the like, be sure to check out the accounts receivable diagram on our Services page. We have a diagram that shows the process of accounts receivable financing in illustrated fashion.

This entry was posted on Monday, July 16th, 2007 and is filed under Working Capital 101.