We Offer Superior Invoice Factoring Services
When businesses need capital but don’t want to borrow money, invoice factoring is the ideal solution. In this option, they sell their outstanding invoices to a factoring company instead of borrowing capital from a bank.
How It Works
In a typical transaction, an invoice is created when a business delivers goods or services to a customer. The buyer may wait for a few weeks or more before paying the invoice. Instead of waiting for clients to pay, a business can receive an advance in the amount owed from a factoring company.
The factor will issue the advance but keeps back a small portion in reserve. This amount will be given back once the invoice is paid, with the factoring fee already deducted. In invoice factoring, you don’t have to worry about interest or loan fee charges. This is because the process involves the assignment of an invoice rather than the creation of debt.
Five Steps to Factoring Invoices
Selling or factoring invoices is very straightforward, with five main steps involved:
- Step 1 – Invoice your customer for goods sold or services completed.
- Step 2 – Submit the invoice to the factoring company or factor.
- Step 3 – Factor provides an immediate advance on approved customers.
- Step 4 – Factor receives payment on the invoice directly from your customer.
- Step 5 – Factor releases the reserve balance to your business less the factoring fee.
Accounts Receivable Factoring Example
Here’s an example of how the numbers might work on a factoring transaction:
- $10,000 – Invoice Amount Customer Owes Business
- $9,000 – Advance Rate Paid to Business (Assumes 90%)
- $1,000 – Reserve Held By Factor (Assumes 10%)
Invoice Paid in 30 days
- $250 – Fee Deducted From Reserve (Assumes 2.5%)
- $750 – Balance of Reserve Paid to Business
- $9,750 – Total Amount Received by Business
Some Facts to Consider
The amounts advanced and reserved as well as the factoring fee differs from company to company because of various factors. These include the industry, customer strength, and the amount of time it takes the customer to pay the invoice.
Some factoring companies will ask for a small, one-time setup fee upon accepting a business, while others will waive it depending on the volume and length of the factoring contract. The values and conditions will vary from company to company, but these will always be spelled out in the proposal and agreement.
Study the information as thoroughly as you can so that you can remain strategic when considering this option. Being aware of how the whole process works helps in minimizing risks.
Advantages of Factoring
In moments when the economy faces challenges, many banks decline giving business loans or lines of credit. Factoring is the more convenient option in this case, as there are fewer restrictions. New companies and even those without strong financials are eligible for invoice factoring. All this is possible since factoring is based on the creditworthiness of the customers paying the invoices.
Another benefit is that you can immediately access capital in invoice factoring. This allows you to quickly pay bills, purchase inventory, manage overhead, and handle other daily operations that need funding.
If you need a testament to invoice factoring’s effectiveness, you should know that many Fortune 500 companies have enhanced their growth using accounts receivable financing over the years.