The collection period, often called the average collection period, is the typical time it takes a business to receive payment after making a credit sale. It is another way of expressing receivables turnover in days.
How it works in factoring
One common formula is:
Average collection period = 365 / receivables turnover
where receivables turnover = annual credit sales / average accounts receivable.
Illustrative example: A manufacturer with $2.4 million in annual credit sales and $400,000 in average receivables has a turnover of 6. Its collection period is about 61 days.
In factoring, the collection period matters for the seller and the factor:
- For the factor: it determines how long funds will be outstanding and how much risk builds up per invoice.
- For the seller: many factoring fees grow with time, so a longer collection period means a higher total cost.
- For pricing: factors may quote better terms for customers with short, predictable collection periods.
The collection period can also be measured per customer, which is often more useful than the company-wide average.
What to check
- Compare the collection period with your stated credit terms
- Look for individual customers whose payment times are much longer than the average
- Use real customer payment data when asking factors for a cost estimate
If your collection period is close to your terms, factoring cost is easy to predict. If it varies widely, pay attention to how time-based fees accumulate.