Invoice factoring is a type of financing where a business sells their account receivables to a factoring company for a discounted value. A business may be able choose to sell some or all their outstanding invoices to maintain revenue stability. The factoring company will then purchase an invoice and advance a percentage of the total to the business. They will also handle the invoices and payment with customers directly. Invoice factoring provides working capital for businesses that want to stabilize their cash flow. In most cases, a factoring company will advance 70-90% of their accounts receivable value, when all payments have been received, they will then issue the remainder.
The Factoring Process
The factoring process is generally the same with different factoring companies, only with varying agreement terms. The initial process would start after a business has invoiced the client, then sends a copy of the invoice to a factoring company. In addition, a factoring company may require a short application to be completed. This application would include information on your accounts receivables and your financials. The process of getting your invoices approved by the factoring companies typically takes 24 hours. If approved, the factoring company would provide your business with an advance of 70 to 90% of the value of the invoices received depending on the terms agreed upon between your business and the factoring company.
Some factoring companies can offer more or less, depending on the creditworthiness of the client, the size of the other risks. The responsibility of collecting payment will then fall to the factoring company. They notify your client through a notice of assignment. This notice will state that your business has partnered with the factoring company. Future payments will go into a designated lockbox account, set up by the factoring company. Finally, once all payments have been collected, the factoring company will send you the remaining invoice balance minus their factoring rate fee.
There are different factoring options, which may be discussed with your factoring company. One option is recourse factoring, which means you will be responsible if your client fails to pay the invoice. This option is the most sought-after since it may offer lower fees and a higher advance. Alternatively, with non-recourse factoring, the factoring company will assume responsibility for non-payment from your clients. In case this occurs, you would not be liable or be required to pay anything. The primary downside is that a factoring company will usually charge a higher fee for this option. Deciding which option and what factoring company best matches your needs is an important aspect of the process.
The traction for factoring services in the past couple of years have increased exponentially. Businesses are finding it to be a profitable way for them to manage cash flow and invest the advances back into their business. Quick access to this working capital can be used to bridge short-term expenses, meet daily operations, and save valuable time.