Explaining ‘Invoice Factoring’
A ‘Factor’ is a third party commercial financial company who purchases the Accounts Receivable from businesses: this transaction is known as ‘Invoice Factoring’. Invoice Factoring exists so that businesses can receive a quick injection of cash, as opposed to waiting the 60 or 90 days for customers to pay their invoices. Invoice Factoring is also known as Accounts Receivable Financing, and Invoice Invoice Factoring.
The majority of Invoice Factoring companies purchase invoices and advance money to the business within 24 hours; however, the nature and terms of Invoice Factoring can (and do) differ among financial service providers and industries. Depending on your customers’ credit histories, your industry, and other specific criteria, the advance rate on your invoices can range from 80% to as high as 95%. The Invoice Factoring company not only collects on your invoices; it also offers back office support to your business.Once the Invoice Factoring company has collected on your customer’s invoice,you’ll be paid the balance of the invoice – less the factor’s fee for assuming the risk. The primary benefit of Invoice Factoring is that businesses no longer need to wait anywhere between one and three months for a customer to pay their accounts: they now have access to cash in hand so they can operate and grow their business.The Advantages of Invoice Factoring
There are a few reasons why Invoice Factoring has become an invaluable financial tool for many businesses, including start ups. As mentioned above, the main benefit is that businesses can now receive a quick boost to their cash flow because Invoice Factoring companies, in general, will provide cash on accounts receivable within 24 hours. This resolves the problems businesses experience with short term cash flow, and in many ways this injection of cash can help to grow a business. Besides handling your customer collections, Invoice Factoring companies can also evaluate your customers’ payment and credit histories.Other benefits of Invoice Factoring include:
• It can be customized to a business’s needs and managed to ensure that capital is available when it’s needed;
• It’s not based on your own business or credit history: it’s based on the quality of your customers’ credit;
• It’s not based on your company’s net worth: it provides a line of credit based on sales;
• There’s no limit to the amount of financing, unlike conventional bank loans;
• This financing will not show up as a debt on your balance sheet, because it’s not a loan.
Who Uses Invoice Factoring?
Companies of all different sizes, including start ups, use Invoice Factoring; and today Invoice Factoring has become common business practice across many industries. Invoice Factoring is now widely used in the transportation industry, including manufacturing, textiles, trucking, oilfield services, wholesale and distribution, and staffing agencies. Interestingly, Invoice Factoring receivables is practiced in many countries around the world and has a long history of success.
Can I Factor? My Company’s New, with No Financial History
Yes, you can! In fact, Invoice Factoring has become an excellent tool for start up companies because no company credit history or balance sheet is required. It’s not really your company’s finances that the Invoice Factoring company is concerned with; they’ll base their financing on your customers’ payment histories and credit scores.
What Percentage of My Invoices Should I Factor?
The answer to this question really depends on the unique needs of your business. Some companies only factor invoices for customers who typically take a long time to pay, while others factor all their invoices. The receivables that a company can factor range anywhere from a few thousand dollars to millions of dollars each and every month.
What’s the Difference between Invoice Factoring and a Bank Loan?
• The difference between Invoice Factoring and a bank loan is that you’re not assuming any debt with Invoice Factoring because it’s not a loan;
• With Invoice Factoring, there’s no emphasis on your balance sheet – it’s all on your customer’s invoices;
• In addition, a bank loan is typically one lump sum, whereas Invoice Factoring provides a steady flow of funds;
• Invoice Factoring companies can also help improve your company’s balance sheet by assisting with your credit and collection functions;
• A bank loan adds to your debt, whereas Invoice Factoring converts receivables (an asset) into cash (another asset);
• And of course, bank loans can be very difficult to get because they’re limited by your balance sheet.
How Do You Start the Invoice Factoring Process?
The Invoice Factoring process can be very simple to set up. The customer will be asked to complete a short application form, and may be required to follow up with other reports and documents.
Recourse and Non Recourse Invoice Factoring: What’s the Difference?
• With Recourse Invoice Factoring the client is ultimately responsibility for the payment of the invoice; whereas
• With Non Recourse Invoice Factoring, the Invoice Factoring company accepts responsibility for the risk of collecting the invoice.It’s important to note that some Invoice Factoring companies over offer both types of Invoice Factoring – recourse and non recourse.
What Are the Contract Terms and Fees Applicable with Invoice Factoring?
There are different fee structures with different Invoice Factoring companies: some factors charge an overall Invoice Factoring fee which is determined by the creditworthiness of your customers and the monthly volume of invoices; while others charge additional fees to cover shipping, money transfers, and other costs associated with doing business. Before signing with any Invoice Factoring company make sure you understand the fees and terms applicable to your contract. Also note that most Invoice Factoring contacts are renewed annually.
Do I Need Credit Insurance on Debtors?
Insurance is not typically required, but in specific circumstances it may be.