Invoice factoring is 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 factoringcan be provided by independent financial providers or by banks. A company that has accounts receivable is waiting for payment from its customers. Depending on the company's finances, you may need that cash to continue operating your business or finance growth.
The longer it takes to collect receivables, the more difficult it will be for a company to execute its operations. Factoring allows a company to sell its receivables all at once instead of having to wait to charge customers. Accounts receivable are sold at a discount, which means that the factoring company can pay the company with the accounts receivable 80% or 90%, depending on the agreement, of the value of the accounts receivable. This may pay off for the company in order to receive the influx of cash.
Invoice factoring is the act of selling the debt of one or more outstanding invoices to another company. The company that buys the debt on its bill is called a factor. By handing over this responsibility to a small factoring company, you don't have to look like the villain when it comes to raising money. And when your customer pays the bill, the factor remits the balance, minus a commission, to your company.
For example, one factor may want the company to pay additional money in the event that one of the company's customers fails to pay an account receivable. However, like most funding methods, factoring accounts receivable has drawbacks and additional fees. While working with an invoice factoring company can be beneficial for small business owners, it also has its downsides. So, if your credit score is low or your financial history includes other warning signs, bill factoring could still be a feasible option.
Invoice factoring loans are a great option for business owners who need financing while waiting for customer payments. If your company has a tight budget, it might make sense to wait for customers to pay instead of having invoices factored at an additional cost. Now that you're more familiar with the invoice factoring process, let's look at an example with the figures above. We're not going to go into detailed accounting here, just know that if you use resource factoring and you're a Bench customer, we'll take care of it for you.
This is necessary from their perspective, but it means that you can't jump in and out of invoice factoring at any time. If you factor invoices, you can expect to receive approximately 80% of the value of your accounts receivable in advance. The best factoring companies also benefit, since the factor can buy accounts receivable or uncollected assets at a reduced price in exchange for providing cash up front. As mentioned earlier, the most notable benefit of invoice factoring is that you can receive the money owed to your company without having to wait for customers to return their money.