A new or growing business who sells on terms probably asks; how does invoice factoring work? The steps simplified for an invoice factoring. Let’s understand how invoice factoring work, and the steps your business would take to make sure that invoice factoring meets your company’s cash flow and credit protection needs.
Cash flow is the lifeblood of any business that ensures its survival, growth, and success. For a company to reach its full potential, having continuous working capital is key to manage the day to day activities. Ensuring a constant influx of cash flow can also leave more room to invest in future opportunities, allowing the business to expand and grow.
However, most businesses in their early lifecycle stage, face different cash inflow problems. Issues can vary from delayed payrolls to unavailable funds to inability to fulfill large orders. Seeking an external funding solution is one of the most appropriate ways to deal with cash flow problems but it is also crucial to understand that not all funding options lead to same results. For you to make an optimal choice, you need to properly scrutinize the financial institutions you plan to work with. They should understand your needs and should provide you with a service that corresponds you the most.
In these cases, considering a bank loan may not be your best option. Due to the current tight lending market, not only have banks made it more difficult to apply for loans, the whole process has become time-consuming as well. In fact, invoice factoring is a non-traditional alternative solution to the banking system that can be a great financing source for any company seeking instant funds to respond to its immediate needs and looking to fulfill future strategic goals.
What is invoice factoring?
It is vital to understand what invoice factoring means and how it can work for your business, for you to be able to make a decision. Factoring also referred to as Accounts Receivable factoring, AR factoring, or Invoice Factoring is a branch of debtor finance where a business sells its invoices/accounts receivable to a factoring company at a discounted price.
As a business, every time you deliver goods or services to your customers, you generate invoices that are usually due in 30, 60 or 90 days. These payment terms can create a gap since delayed payments mean little to no cash inflow. This will leave you struggling to meet your monthly expenses and other miscellaneous needs that are necessary to keep a business running.
A factoring company is considered to bridge this gap for you by paying an upfront payment of up to 90%, depending on the amount due from your good invoices. Therefore, when you choose to factor your invoices, the factoring company will evaluate your accounts receivable creditworthiness and then offer you an advance payment that would free up the tied-up money in these invoices. A notification will be sent to your customers that on due dates, the debt will be collected by the factoring company. Once the Factor has collected the due amounts, the advanced amount and the factoring service fees will be deducted, and whatever balance remains will be returned to you. This way, invoice factoring allows your business to ensure steady cash flow and continuous working capital to manage your operations and fund your urgent needs.
For example, a Wine & Spirits Company is seeking immediate funding to support its working capital. The company reaches out to a factoring company to sell its creditworthy invoices, due in 30 days, and amount to $150,000 in total. The factoring company accepts to buy them for 90% of their value, meaning $135,000. According to the original terms of the invoices, the factoring company will collect the due invoices from the respective customers of the Wine & Spirits Company. From the remaining $15,000 balance, they will deduct their factoring service fees and whatever remains will be returned back to the Wine & Spirits Company.
How does Invoice Factoring work?
Facing cash flow problems while you know you are eligible for the money you cannot yet access can be very frustrating. So if your business does not have sufficient working capital and is in a situation where there is pressure for you to cover urgent needs, Invoice Factoring can be a great alternative funding solution. Funding is always available and can be provided in as little as 24 hours for as long as your business holds creditworthy invoices that you are willing to factor.
When you contact a factor to sell your invoices, you are taking advantage of your already owned assets and optimally boosting your cash inflow. Invoice factoring can help by quickly and effectively providing you with continuous working capital to cover necessary costs.
Here is the Invoice Factoring Process step by step:
What are the benefits of Invoice factoring?
If you sell your products or services to creditworthy commercial or government customers and you give them payment terms of up to 90 days, Invoice Factoring could be the solution to meet your working capital needs.
Invoice factoring is a great alternative funding option that allows you to optimally manage your cash inflow and daily operations, along with having the ability to invest in growth opportunities. Invoice Factoring can provide you with numerous benefits stated as follows:
- Up to 90% upfront payment;
- Give you a Free Credit Department;
- Start-ups and small companies are welcomed;
- Same day funding as you can receive funds as in as little as 24 hours;
- Leverage your accounts receivables or purchase orders;
- Fast access to cash and continuous working capital;
- Flexible negotiable terms;
- Reasonable service fees;
- Professional receivable management and industry experience;
- Based on your clients’ creditworthiness, not your own credit line;
- Provides back-office support;
- Factoring is not a loan, meaningless debt on your balance sheet;
- Funding grows as your receivables grow.