Accounts Receivable Factoring: How AR Factoring Works

If you have arrived here from a finance or controller role rather than an owner-operator one, the vocabulary differs but the product does not. AR factoring converts receivables into immediate cash by selling them at a discount.

Structures you will be offered

• Notification vs non-notification. Whether your customers are told to remit to the factor. Non-notification requires stronger financials.
• Recourse vs non-recourse. Where credit risk sits. Full breakdown →
• Whole-turnover vs selective. Entire ledger or chosen accounts.
• Concentration limits. Caps on how much of the facility one customer can represent. Frequently the binding constraint.

AR factoring vs an AR line of credit

An asset-based line of credit against receivables is typically cheaper and does not transfer collections, but requires covenant compliance, regular borrowing-base reporting and audited or reviewed financials. Factoring trades cost for speed and for far lighter qualification. Companies frequently move from factoring to ABL as they mature — check the UCC release terms in your factoring agreement before you assume that transition is easy.

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Accounting treatment

Whether a factoring arrangement is treated as a true sale or as secured borrowing depends on the transfer of control and risk, and non-recourse structures are more likely to qualify as a sale. This determines whether the receivable leaves your balance sheet. Confirm treatment with your accountant before signing — we publish research, not accounting advice.

Nothing here is estimated. A blank field means we have not yet obtained a primary source for it. We publish gaps rather than guesses — that is the point of the index. How collection works →