Technically, invoice factoring is not a loan. Rather, you sell your invoices at a discount to a factoring company in exchange for a lump sum in cash. The factoring company then owns the invoices and gets paid when it charges them to its customers, usually within 30 to 90 days. Two terms that are often used interchangeably are invoice financing and invoice factoring.
Invoice factoring is a type of invoice financing. However, when most people use the term “invoice financing”, they refer to the financing of accounts receivable.
Invoice factoringis a way in which companies can finance cash flow by selling their invoices to a third party (a factor or a factoring company) at a discount. Invoice factoring can be provided by independent financial providers or by banks.
Companies that work with a bank-owned factoring company may also have an easier time transitioning to a commercial loan at a later date. Only companies that bill customers are eligible for factoring, so the factoring process begins when your company does the work for a customer. If you don't want a third party to notify your customers, choose invoice financing or invoice discounting. Easier transition to a bank loan: A banking factor works with many companies that consider themselves outside the traditional credit fund.
If you're a new company or have poor credit, it may be easier to qualify for factoring, as it depends heavily on your customers' credit profiles. If you have a strong relationship with your customers and can quickly collect their outstanding invoices, discounting invoices can be a particularly quick and even affordable method of financing. Once your company is approved to work with a factoring company, it will identify the individual invoices for which you want to apply for a loan. However, with this type of loan, unpaid bills act as collateral to secure a line of credit.
Companies that use invoice financing are responsible for collecting payment and use those funds to reimburse the lender. Some factoring companies offer no-recourse factoring, in which the company accepts the loss if its customers don't pay. Because resource factoring poses less risk to the factoring company, it's usually the most common agreement. Many business customers prefer to maintain their own credit control rather than resort to a factoring service that insists on chasing customers to get them to pay.
Unlike many independent factoring companies that work with multiple funding sources, a bank acts as a direct source of funds and eliminates the middleman. Although you can't guarantee that the bill will be collected, the interest you pay is based on the time it takes your customer to pay the bill. Invoice factoring isn't a traditional business loan where you receive a lump sum of money and return it over time. While you know that the money from invoices will come eventually, customers who pay slowly or long payment deadlines could have a negative impact on your incoming cash flow and this could be a problem for your company.