In today’s dynamic financial landscape, both businesses and banks are on a constant quest for innovative ways to drive growth, manage risk, and boost profitability. One increasingly valuable tool in this pursuit is accounts receivable factoring—a financing solution that transforms unpaid invoices into immediate cash flow. This not only helps businesses overcome liquidity challenges but also offers banks a stable and profitable revenue stream.
Let’s dive into how factoring delivers value on both sides of the equation.
What Is Accounts Receivable Factoring?
Accounts receivable factoring is a financial transaction where a business sells its outstanding invoices (receivables) to a third party—often a bank or specialized finance company—at a discount. Unlike traditional loans, factoring is an asset sale rather than a debt, meaning businesses gain access to cash without adding liabilities to their balance sheet.
The Three Key Players:
- The Client (Seller): The business selling its receivables.
- The Account Debtor: The customer responsible for paying the invoice.
- The Factor (Bank): The entity that purchases the receivables and advances funds.
Once the factor purchases the invoices, it assumes responsibility for collecting payment from the account debtor. This setup provides businesses with quick liquidity and shifts the collection risk to the bank.
The Business Advantage: Why Companies Use Factoring
For small and mid-sized businesses (SMBs) in particular, factoring can be a powerful growth enabler. Key benefits include:
- Immediate Cash Flow
Factoring converts receivables into cash, helping businesses meet payroll, invest in inventory, manage seasonal swings, or capitalize on new opportunities. - No Additional Debt
Because it’s not a loan, factoring doesn’t impact the company’s debt-to-equity ratio or borrowing capacity—an important distinction for growing firms. - Reduced Risk
Businesses transfer the risk of non-payment or delayed payment to the factor, improving financial predictability. - Built-In Flexibility
Companies can choose to factor only when needed, allowing for a customized and scalable financing solution.
By alleviating cash flow constraints, factoring frees businesses to focus on strategy, operations, and expansion—rather than collections.
Why Banks Should Care: The Strategic Upside
Factoring isn’t just good for businesses—it’s a smart play for banks as well. Here’s how:
- New Revenue Streams
Banks can earn from both discount fees and interest on advanced funds. Returns on net funds employed typically range from 12% to 18%, offering strong yield potential. - Lower Credit Risk
Risk is spread across a diversified pool of account debtors instead of being concentrated in a single borrower. This reduces the chance of significant losses and improves portfolio stability. - Stronger Client Relationships
Providing factoring deepens relationships with business clients and attracts new ones seeking flexible, non-traditional financing. - Regulatory Advantages
As factoring is an asset purchase and not a loan, it may offer favorable treatment under bankruptcy and usury laws, enhancing compliance and reducing legal exposure.
Additionally, factoring creates referral opportunities across commercial lending teams, fostering internal collaboration and boosting cross-sell potential.
How the Factoring Process Works
The mechanics of factoring are simple yet effective:
- Invoice Submission
The business submits eligible invoices—usually after goods are delivered or services are completed. - Verification and Advance
The factor verifies the invoice and advances 75% to 90% of its value upfront. - Collection and Final Payment
The factor collects payment from the account debtor and remits the remaining balance (minus fees) to the business.
This streamlined process ensures rapid access to funds while maintaining robust risk controls.
Factoring Fee Structure & Profitability
Typical fees include:
- Discount Fee: 1%–3% of the invoice value.
- Interest Charges: Often based on WSJ Prime + 2.5%.
These rates reflect the value provided to the client and the risks borne by the factor. For banks, the profitability and relatively low risk make factoring a compelling addition to their portfolio of services.
A Growth-Driven Partnership
Accounts receivable factoring is a win-win solution:
- For businesses, it unlocks working capital without additional debt or lengthy payment cycles.
- For banks, it provides a high-yield, low-risk revenue stream and positions them as proactive partners in their clients’ growth.
By embracing factoring, banks not only serve the financing needs of today’s businesses but also play a direct role in supporting local economies and long-term client success.
How 2GO’s Banking Practice Team Can Help
At 2GO Advisory Group, our Banking Practice Team—led by Glen Terry—brings deep industry expertise to help both businesses and financial institutions implement effective factoring solutions.
For Businesses:
We help companies navigate liquidity challenges and growth opportunities by identifying the right factoring partner and structuring tailored solutions.
For Banks:
Our team provides end-to-end support for developing and integrating factoring services—from regulatory compliance and risk management to operational setup and client acquisition strategies.
By partnering with us, banks can confidently offer factoring as a competitive advantage—and businesses can gain a financial ally in their growth journey.
Ready to unlock growth through factoring?
Let the 2GO Advisory Group guide your next step toward smarter, faster, and more flexible financing. I am the lead for the Banking and Financial Services Practice Group and am delighted to assist companies and banks with the best decisions and support for financing. If you would like assistance with your operational, financial, or funding challenges, please call Glen Terry at (951) 310-8480 or email me at gterry@cfos2go.com.
Glen Terry is a seasoned executive with more than four decades of extensive experience in the banking sector. He has assisted companies in resolving challenges that have arisen between borrowers and their banks. He has partnered with companies to restructure and renegotiate banking relationships, including transitioning to new providers.
For your Talent needs in direct hire, full-time or part-time contract staffing, contact Executive Recruiter, Leesa Meintzer at leesa@2gorecruiting.com.
Leesa Meintzer is an executive recruiter with more than 20 years of experience in talent acquisition. She excels in partnering across various business functions and brings a comprehensive perspective to talent acquisition. She works with Engineering, Healthcare, Product, Finance, Accounting, Business Operations, Sales, Legal, Human Resources, Learning & Development, and Talent Acquisition for corporate and high-growth start-ups.
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