Invoice Factoring
Invoice factoring, also known as accounts receivable factoring or simply factoring, is a financial transaction in which a business sells its outstanding invoices or accounts receivable to a third-party financial company, known as a “factor.” The factor then advances a portion of the invoice amount to the business upfront, typically around 80% to 90% of the invoice value, and retains the remaining balance as a reserve.
Here’s how invoice factoring works in more detail:
Issuing Invoices: A business provides goods or services to its customers and issues invoices for the amounts owed. These invoices represent accounts receivable, which are essentially promises by customers to pay for the delivered goods or services at a later date.
Factor Engagement: The business enters into an agreement with a factoring company (the factor). This agreement outlines the terms and conditions of the factoring arrangement, including the fees, the percentage of the invoice amount to be advanced, and other relevant terms.
Invoice Submission: The business submits its invoices to the factor for verification and approval. The factor assesses the creditworthiness of the business’s customers and the validity of the invoices.
Advance: Once the invoices are approved, the factor advances a significant portion of the invoice amount to the business, usually within 24 to 48 hours. This immediate cash infusion can help the business cover its operating expenses, invest in growth, or address other financial needs.
Reserve: The factor retains the remaining balance, known as the “reserve,” which is typically 10% to 20% of the invoice value, as a security against potential non-payment by the customer. The reserve is released to the business once the customer pays the invoice in full, minus the factor’s fees.
Payment Collection: The factor takes responsibility for collecting payments directly from the business’s customers. When customers pay the invoices, the factor deducts its fees and releases the reserve amount to the business.
Ongoing Process: The business continues to issue new invoices and can choose to factor them as needed, creating a revolving line of credit based on its outstanding receivables.
Key points to note about invoice factoring:
Immediate Cash Flow: Factoring provides businesses with immediate cash flow by converting unpaid invoices into cash, helping them meet financial obligations and seize growth opportunities.
Creditworthiness: Factoring decisions are often based on the creditworthiness of the business’s customers rather than the business itself. This can be advantageous for businesses with strong sales but limited credit history or collateral.
Fees: Factoring companies charge fees for their services, typically comprising a discount fee (based on the invoice amount) and sometimes additional fees for credit checks and other services. Industry average fees can range from 0.50% to 3.00% per month depending on a number of factors including debtor creditworthiness, advance rate, amount factored on a monthly basis, industry risks, and contract length.
Customer Relationships: The factoring process involves direct interaction with the business’s customers, as the factor collects payments. Some businesses prefer to maintain control over their customer relationships, so they may consider this aspect carefully.
Customized Solutions: Factoring arrangements can be customized to the specific needs of the business, making it a very flexible financing option.
In conclusion:
Invoice factoring is a valuable financial tool for businesses looking to manage cash flow, accelerate growth, and access working capital quickly without incurring debt. However, businesses should carefully assess the costs and benefits of factoring to determine if it aligns with their financial goals and circumstances.
We are always happy to review any invoices and debtor creditworthiness to pre-approve your invoices for factoring. Please give us a call at (843) 790-3661, fill out the form on the Homepage or book some time on my calendar that’s convenient for you. Regular business hours are Monday through Friday from 8:00 am to 6:00 pm Eastern Time. Other times by appointment only.