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What Is Invoice Factoring? |
What is Invoice Factoring? Invoice factoring companies provide businesses in need of instant capital with the funds necessary for them to operate. Invoice factoring is not a loan from the factoring company, instead the factoring company purchases the invoices owed or accounts receivables from the business. The invoices are sold to the factoring company who then instantly fronts a percentage (typically 65% to 90%) of the money owed. The invoices and account receivables are sent by and paid directly to the factoring company, which then sends the company the remaining amount due, less a small fee for the transaction. Most businesses opt for invoice factoring, as opposed to a business loan, because the funds provided through invoice factoring are easier to obtain. And since invoice factoring companies base their decision to provide funds on the credit worthiness of the company's clients, as opposed to the company itself, no debt is added to the company. There are several advantages to the invoice factoring method. The most important advantage from a business perspective is that there is no delay in the business' day to day operations or cash flow. On projects that require equipment or other resources for deliverables, invoice factoring allows the work to proceed. Another major advantage to invoice factoring is that the business does not incur any liability in the loan repayment; the clients required to pay the invoices are carefully screened for creditworthiness before the factoring is approved. Therefore it is the responsibility of the factoring company to obtain the payment funds. From a business perspective, retaining full ownership of the company and not having any future debt to repay is very important when obtaining funds from outside sources. Unlike angel investors or capital venture lenders, with invoice factoring the company does not lose any decision making abilities to the factoring company. The company also does not owe a debt after the funds have been received, as the debt still belongs to the clients that have been invoiced. Factoring is beneficial to all parties involved. Businesses are able to maintain their cash flow, focus on day-to-day operations and scale their resources as required by the customers; customers receive timely products and services; and the factoring company receives (from the customers) the funds they allocated along with the preset transaction fee. This win-win-win situation makes factoring an excellent choice for both small and large businesses alike.
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