One of the most common questions a business of any size may ask includes how does invoice factoring work for a company, and what are the benefits. The answer to those two questions is really quite simple, and for most businesses invoice favoring is a simple process that is a cost-effective way to maintain cash flow.
What is Factoring?
Before looking at how does invoice factoring work for your particular company or business, the first step is to understand what it is. Factoring involved your business doing work or selling product to another company, business or even a government agency.
In a typical transaction, you would complete the work or the sale and generate an invoice, and the buyer would then have been 30 to 90 days to make payment. This leaves you basically extending credit to the buyer over that period of time, meaning you don’t have access to those funds.
With factoring, a third party, the factor, buys those outstanding accounts receivables and pays you at least 80% of the value. The factor then collects from your buyer and, once the accounts receivable are paid in full the factor deducts their fees from the withholdings and forwards your company the difference.
This is not a loan, and there is no repayment. The factor is simply advancing you the funding that will be collected on the terms of the invoice you generated to your customer.
The second part of the how does invoice factoring work and what are the benefits question may be much clearer after reading through the information on what factoring is.
When the factor is able to advance the business for up to 80% or more of the accounts receivable, the business is able to use that money immediately. This means you can pay off suppliers, keep your business growing and even take on new business without having to worry about taking out a short-term business loan, a line of credit or tap into other higher-cost financing options.
Additionally, with factoring, your business credit is not part of the equation. Instead, the factor just needs to have you meet the minimum amount of total accounts receivable and to be working with creditworthy customers.
With factoring, a business can be in full control, factoring as many or as few accounts receivable as necessary. Different factors will have different terms of service, just make sure to read information and choose a factoring company that is right for your needs.