Accounts Receivable Factoring as a Financing Alternative: Structuring the Transaction and Mitigating Risks

Description

The factoring industry is growing at a rapid pace and the demand for factoring will likely continue. A/R factoring, often referred to as invoice discounting, is a source of liquidity for business borrowers that sell on credit terms. The transaction takes place between a business that generates accounts receivables and sells them, at a discount, to an entity (either a bank or non-bank lender or factoring company).

By selling the A/R to the purchaser, the business receives cash flows from the A/Rs earlier than if it had waited to receive payment directly from its customers on the A/Rs payment due date. The business also transfers the risk of its customer not honoring payments due under the purchased A/R to the purchaser. The purchase price of the A/R is a percentage of the face amount owed under the A/R. The differential between the face amount of the A/R and such A/R’s purchase price is designed to compensate the purchaser for acquiring the risk of non-payment and for the present value of the funds used for the purchase.

The key advantages of factoring include quick cash, no debt on the business-seller’s balance sheet, the transfer of non-payment risk to the purchaser, and the elimination of collections operations with respect to the sold A/Rs. However, while factoring provides the borrower with fast cash, it usually costs more than traditional borrowing.

Listen as our authoritative panel discusses the common types of factoring arrangements, how to negotiate and structure a factoring agreement, and common legal issues and pitfalls to avoid.