Whatever business you may be a part of or running, having a good cash flow is always imperative. Anyone who is running a B2B operation will know that late payment of invoicing is a persistent and ever present problem and can build stress within the company, even when it is doing really well.
Invoice factoring is a form of accounts receivable financing which will help you get paid on time every time and will enable you to perform daily operations and payments normally. While invoice factoring as a does have its pros and cons, the cons for the most part apply only if the process is used on a business model which does not need this type of financing.
What is Invoice Factoring?
Invoice factoring is a type of financial transaction where you, as a business owner will sell your accounts receivable to a third party, called a factor at 80% to 95% of their face value. The third party then goes around collecting payments for the invoices and forwards any balances that may be left less charges to you.
Here is a step by step illustration of how the process works:
Step 1: You contact a factoring company and sell your overdue invoices to them at a pre-determined rate which is typically 80% to 95% of the invoice’s value.
Step 2: The factoring company will provide you said value, usually within 24 hours thereby freeing up capital for your company.
Step 3: The factoring company then collects the payment due on those invoices it just got from you.
Step 4: Your customers pay the factoring company instead of you and any residual balance which is left is immediately remitted to you.
This type of accounts receivable financing will help you free up locked capital quicker and also take care of a huge headache by allowing you to pursue your business goals rather than running after customers for payment.
What Types of Businesses is Invoice Factoring Good For?
Invoice factoring is typically applicable when businesses are extending their customers a line of credit, or if they are a B2B operation selling to other companies. Also businesses which need cash now, rather than cash later can use invoice factoring to get the money they need in order to run their operations normally. By using Invoice factoring you will be able to plan out your cash flow better, pay bills and take care of payroll. Finally when you use invoice factoring, the factor will then take care of your sales ledger and do the running after for you.
Invoice factoring is a brilliant solution to traditional bank loans whereby you can free up working capital and raise cash for your business immediately. With this type of accounts receivable financing, your cash is in the bank, the funding is immediate and is primarily driven by your costumer’s demand for your products. Finally, another advantage of invoice factoring is that the service fee is only charged against advances that are not fulfilled by your customers. So every time a customer pays, the debt is automatically repaid.