Invoice factoring refers to the selling of an accounts receivable invoice to a factoring company or a factor in order to obtain funds for the business. Factoring is not a loan, but a form of financing that grows with the sales of your company. Since the amount builds up with rising sales figures, you do not have to incur additional loans to sustain business costs.
Important Benefits of Invoice Factoring
Eliminate Bad Debt from Business Income Statement – A non-recourse factor eliminates bad debt from your business income statement by assuming the risk of bad debt itself.
Managing Your Invoice Processing Tasks – Most of your tasks related to invoice processing are taken care of by the factor. Typically, a factor manages important tasks such as posting invoices, entering payments, depositing checks, and generating regular computer reports.
Get Unlimited Capital – The biggest advantage of invoice factoring is that the funds grow with your sales figures. As the sales figures of your company continue to rise, you become eligible for higher amounts. Thus, your company’s growing financial needs are taken care of immediately.
Benefit from Different Early Payment Discounts – Many companies offer early payment discounts and volume discounts to customers. Since you have the option of raising funds immediately through invoice factoring, you can take advantage of such discounts when purchasing raw materials. This can considerably reduce your manufacturing costs. If you are not in a dire need of finances, you do not have to give any form of discounts to your clients to boost company sales.
You Don’t Give Up Company Equity – Your equity in the company is intact when you obtain financing through invoice factoring.
When extending funds, the factoring company considers the dollar amount of the outstanding account receivables of your business venture. There are several good factoring firms out there to help you with your business needs.
The biggest advantage of working with a good factoring firm is that clients save you from the trouble of waiting for money owed to you. In this light, it’s a less expensive way for financing invoices. Every “accounts receivable factoring firm” differs in terms of the fees charged and the services offered.
Selecting a Suitable Factoring Company
Since invoice factoring is like getting a cash advance on your invoices, it is important to look closely at companies that provide invoice factoring services. The process can help your small business finance operations by selling your receivables, which means you will not get paid the full amount of your invoices.
You need to look into several details before selecting a factoring company. Each company has its own policies to determine the fee structure. When selecting a factoring company, it is important to understand the various factors that a company takes into account to decide on fees.
Usually, accounts receivable factoring companies decide fees to be charged to you based on the credit worthiness and the financial strength your customers. Typically, companies look at important details such as how frequently you bill your customers, how long your customers have been in the business and how soon they settle your invoices.
You will be required to provide your outstanding invoices when working with a factoring company. The factoring company then extends funds to your business depending on your advance rate. When working with a factoring firm, you will submit outstanding invoices to them. They will then provide your business with cash based upon your advance rate. Advance rates usually fall in a range from 75% to 90%. In other words, the company will provide you funds in the range of $750 and $900 for every $1,000 of outstanding invoices submitted to the company.
Invoice factoring can be a good source of business finance; however, it still pays to investigate thoroughly to make an informed decision.