Invoice factoring is important because it offers quick financing for eligible businesses. In these cases, by working with a factoring company, you can effectively sell the payments owed to you for outstanding invoices and transfer your risks to a factoring company if your customer pays late or doesn't pay their bill. 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 of cash.
The factoring company then owns the invoices and gets paid when it charges them to its customers, usually within 30 to 90 days. In short, invoice factoring is the purchase of your accounts receivable, that is, your unpaid invoices no older than 30 days. You do the work, you sell us the invoice, we advance you up to 100 percent of the bill immediately and we charge your customer the money. Invoice factoring involves handing over full control of your invoices to an invoice factoring company.
Some business owners don't like this because they don't want another company to have access to their financial information. Invoice factoring is a financing process in which a company sells its unpaid invoices to a third-party company, called a factoring company. When an invoice is sold, the third company pays the company a percentage of the total amount originally charged to the customer and generally assumes full responsibility for collecting payment from the buyer. This transaction allows companies to have quick access to cash before customers pay for the goods or services received, allowing them to immediately reinvest that cash.
Small businesses can use factoring as an alternative to lending. Instead of working with banks or lenders, small business owners can work with a third company called a factoring company (also known simply as a “factor”) to access funds by “factoring” outstanding invoices. Invoice factoring is a financing plan designed specifically for companies that issue invoices with net terms, usually between 30 and 90 days. With invoice factoring, companies can sell their unpaid invoices for quick access to additional funds.
A no recourse clause basically states that you won't be responsible if your customer doesn't pay the bill. As long as you approach any of the above questions with confidence, you should be able to obtain approval for the financing of the invoices. The amount you receive is usually around 80% of the total value of the invoice and will be indicated beforehand in your agreement with the factor. The price discount that the factor expects is affected by the volume and dollar amount of the invoices: the higher the fee, the lower the fee plus any risk of the customer not paying and the number of days left until the due date of payment.
After checking the creditworthiness of their billed customer, factoring companies anticipate up to 100 percent of the bill, providing them with immediate cash flow to use for their business needs. In the case of resource factoring, the factoring company has the right to collect payment from you if your customers don't pay their bill on time. Some companies may need their funds soon and are willing to sacrifice part of the value of the bill, but losing a percentage of high-value invoices can be really harmful in the long run. Once the “sale” of this invoice is finalized, the responsibility for collecting payment from your customer shifts from you to the factor.
If you find that cash flow gaps due to slow customer payments are restricting the growth or operation of your business, you might think that the solution would be to simply ask your customers to pay their bills sooner. These types of funding plans work well for some growing businesses because they help you unlock the funds you currently have in unpaid, high-value invoices. In this post, we'll explain what invoice factoring is and discuss the benefits and drawbacks of this funding option. Some companies may require you to sell a certain amount of your bill each month and to sign a long-term contract.
The main difference between invoice factoring and accounts receivable financing lies in the underwriting criteria of the transaction structures. While it can be frustrating to wait for customers to pay their remaining balances, opting for invoice factoring is a viable solution. In general, invoice factoring takes between 2 and 7 days and is financed approximately 1 to 3 business days later. If you're looking for a way to gain even faster access to business funds, you can consider a wider range of sources in addition to invoice factoring.