B2B Businesses can obtain funds in as quick as a week backed by their accounts receivable.
Contact Factoring Specialist, Chris Lehnes
For B2B businesses, accounts receivable (AR) factoring is essentially a tool to accelerate cash flow. It allows you to trade the “waiting game” of Net-30 or Net-60 terms for immediate liquidity.
Instead of waiting for a client to pay an invoice, you sell that invoice to a third party (a “factor”) who advances you the majority of the funds immediately. This converts a stagnant asset (an unpaid invoice) into active working capital you can use to fund operations, payroll, or growth.
The following guide details how B2B businesses can utilize this strategy to meet working capital needs.
1. The Core Mechanism: How it Works
Factoring is technically an asset sale, not a loan. You are selling the right to collect on the invoice.
- Step 1: Invoicing. You deliver your goods/services and send an invoice to your B2B customer as usual.
- Step 2: Sale. You submit a copy of that invoice to the factoring company.
- Step 3: The Advance. The factor verifies the invoice and wires you an advance—typically 80% to 90% of the invoice value—within 24 to 48 hours.
- Step 4: Collection. The factor waits for your customer to pay them directly according to the invoice terms (e.g., 30 or 60 days).
- Step 5: The Rebate. Once the customer pays the full amount, the factor releases the remaining 10–20% to you, minus their fee (usually 1–5%).
2. Strategic Uses for Working Capital
You can use the immediate infusion of cash to solve specific operational friction points common in B2B models:
- Bridging the “Gap”: If your expenses (payroll, rent, utilities) are due weekly or bi-weekly, but your customers pay monthly, you have a cash flow gap. Factoring aligns your revenue intake with your expense outflow.
- Fulfilling Large Orders: B2B growth often hurts cash flow before helping it. If you land a massive contract, you need cash now to buy raw materials and hire labor to fulfill it. Factoring existing invoices gives you the capital to fund these new orders without taking on debt.
- Negotiating Supplier Discounts: With cash on hand, you can pay your own suppliers early. often unlocking “2/10 Net 30” discounts (a 2% discount if paid within 10 days). This discount can sometimes offset the cost of the factoring fee itself.
- Smoothing Seasonality: For businesses with peak seasons (e.g., manufacturing for holiday retail), factoring during the busy season ensures you have the liquidity to maximize production when it matters most.
3. Critical Decisions: Configuring Your Factoring
To use this effectively, you must choose the right “type” of factoring for your risk profile.
Recourse vs. Non-Recourse
This determines who is liable if your client never pays (e.g., they go bankrupt).
- Recourse Factoring: You are liable. If the client doesn’t pay, you must buy the invoice back from the factor. Benefit: Lower fees.
- Non-Recourse Factoring: The factor assumes the credit risk. If the client defaults due to insolvency, the factor absorbs the loss. Benefit: Zero risk for you, but higher fees.
Notification vs. Non-Notification
- Notification: Your customer is notified to pay the factor directly. This is standard but can sometimes signal to customers that you are tight on cash.
- Non-Notification (White Label): The customer pays into a bank account that looks like yours but is controlled by the factor. The customer is unaware of the factoring arrangement.
4. Who Qualifies?
Unlike a bank loan, approval for factoring is based primarily on your customer’s creditworthiness, not yours.
- Ideal Candidate: A B2B business (startups included) with reliable, large corporate or government clients who pay slowly but surely.
- Less Ideal: Businesses with B2C customers (individuals) or clients with poor credit histories.
