What is invoice factoring? How it works and its pros, cons

In addition, the discount rate may be influenced by how many alternative sources of financing a company has at its disposal. With invoicing factoring, a business sells any number of unpaid invoices to a factor for less than the amount it is owed. In return, the business receives the majority of the invoice amount — as much as 90% — within a few business days, rather than having to wait the 30-, 60- or 90-day period specified on the invoice. In most factoring situations, the factor becomes responsible for collecting on the invoice. Find out more about alternative small business financing options and factoring vs. bank loans.

For a deeper dive into what determines your factoring rate, visit our blog on Understanding Rates, Fees, and the Total Cost of a Factoring Agreement. When your customers are able to better access funds, they too can spend and grow more. Selective factoring is when you have a small number of your invoices factored. It only applies to the initial funds advanced and is calculated as an annual rate that is charged weekly or monthly.

Slow Paying Clients

The invoice amount – the higher the cost, the greater the risk for the financier. However, factoring involves much beyond this basic definition and Stenn has produced this guide to give you important information to consider. Discover the products that 33,000+ customers depend on to fuel their growth. For more information, read our full article about taxes and factoring. The Seller provides a service or delivers a product, then sends an invoice to the Debtor. GoCardless offers the ideal solution for multi currency payment gateway issues. The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless.

Your bill would have a deadline for payment as well as instructions on how they can pay you back. You can find a factor and sell your invoice to them as soon as you’ve sent the invoice and your customer has agreed to pay. Counter-party credit risk related to clients and risk-covered debtors.

How is Invoice Factoring Different from a Bank Loan?

Many factoring facilities are unsuitable for businesses which deal mostly with one or two main customers. This is due to factoring companies stipulating low ‘concentration limits’ . There are often also limits on invoices due to foreign customers for export activity . While there are many types of small business loans and alternative financing out there, not all are a fit for every business. Some require a certain credit score, or a minimum operating history. What you’re looking for is a type of small business lending that fits your needs at a reasonable and manageable cost.

Invoice factoring is a general category that classifies various types of accounts receivable financing under one umbrella. These distinct types have been developed and tailored to serve the needs of specific purposes or industries. Invoice factoring is important because it offers fast funding for businesses that qualify. Invoice factoring is a process in which a financing company, often called a “factor,” advances cash based on uncollected invoices. Factors typically advance 80% to 90% of invoice totals, so it can seem like a quick, easy solution to meet cash flow challenges.

Invoice financing vs. invoice factoring: What’s the difference?

The approach is most often used by startups and growing companies that are trying to act quickly and may not want to go through the conventional bank loan application process. Factoring can be more costly than other kinds of financing, but many companies like the assurance it provides that they’ll obtain needed cash quickly. AltLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers.

A factor’s presence may also lead customers to think that the company doesn’t have the proper resources to handle its business. Slow-paying customers — and, of course, those whose bills are overdue — can cause big headaches, especially for small businesses. If it’s the owner who has to follow up on a late invoice, that’s time not spent with other customers or on higher-value activities. If an accounts receivable department handles collections, the tedious time spent chasing down a delayed payment may impact morale. Invoice factoring is a fast, easy form of business financing for certain qualifying businesses.

Funding

Bank loans are based on your creditworthiness, funding is not as fast since the application process can take longer and business loans usually require long-term contracts that can leave you in debt. If your business has invoices that are not only weighing down your balance sheet, but are costing you time, money and effort to collect, consider selling these invoices to an experienced invoice factoring company.

Invoice factoring is a way for businesses to fund cash flow by selling their invoices to a third party at a discount. Invoice factoring can be provided by independent finance providers, or by banks.

Automate Invoice Factoring With NetSuite

Further, your payments, when paid to you directly by your customers, aren’t commingled with those of other businesses, which makes your record-keeping easier. This isn’t the case when payments are in the name of the factoring company. In fact, it’s not uncommon for factoring companies to misapply your customer payments to another business, which means you still have to closely watch all payments and reconcile them on your end. However, generally speaking, when you enter an invoice factoring invoice factoring agreement, you authorize the factor to collect payments from your customers. In fact, most factoring companies require you to change the payments to their name. Whether you get a line of credit, leverage an early payment program or enter into an invoice factoring agreement, your business’s success often depends on securing working capital. This is an important point because with invoice financing, you remain in control of the sales ledger, collections, and invoice processing.

To this end, the factor will look at the customers’ credit ratings, try to assess their accounts payable performance and consider other issues that may affect payment, such as outstanding litigation. The factor must also make sure the invoice is valid, which may include a review of shipping statements and other documentation. The main difference between invoice factoring andaccounts receivable financinglies in the underwriting criteria of the deal structures. While factoring offers greater flexibility, A/R financing has more strictness around the credit profile. Consequently, A/R financing typically offers preferred financing terms.