What is Invoice Factoring?
Invoice Factoring is a form of financing, where your business sells its invoices to a factoring company in exchange for up-front funding. When the invoice is paid by the customer, the remaining balance is paid to your business minus a fee.
Invoice Factoring allows you to receive the working capital you need to maintain operations and plan for the future, but without taking on the periodic fixed payments associated with a term loan.
If slow-paying clients are stalling your ability to pay bills or meet payroll, or if they delay your purchase of new technology and equipment, or your hiring of more staff, Invoice Factoring can help you bolster cash flow by liquidating your outstanding accounts receivable to keep your business moving.
Rather than waiting 30 to 120 days for your customers to pay you the money you need to run your business, our Invoice Factoring facility provides you with working capital within 24 to 48 hours.
How Does Invoice Factoring Work?
1.Business sell invoices to a factoring company (the factor) at a discounted rate
2.The factor advances a lump sum up to 95% of the value of the invoice
3.The factor then collects all payments directly from the client
4.The factor sends the remaining balance to the business, minus any fees, which is typically an agreed-upon percentage
Invoice Financing and Invoice Factoring: What’s the Difference?
The main difference between Invoice Factoring and Invoice Financing is which party is responsible for collecting on the unpaid invoices. With Invoice Financing, the customer retains full control of collections. In Invoice Factoring, the factoring company purchases the unpaid invoices and takes over the collections process.
After submitting your invoices to the lender for Invoice Financing, you’ll receive the amount of the invoice minus a percentage as payment. Once the client pays you, you pay back the lender.
While it may be helpful having the lender collect unpaid invoices on your behalf, understand that you will have less control over the collections process and that your clients may become aware of your cash flow shortages.
FAQs About Invoice Factoring
What does it mean to factor an invoice?
Factoring an invoice means selling it to a lender in return for a discounted advance. Then, the lender collects the unpaid invoice from your customers on your behalf.
Is invoice factoring a loan?
Invoice factoring is not a loan. Factoring allows you to release untapped working capital from your accounts receivable to meet your immediate cash needs.
What is the difference between invoice factoring and invoice discounting?
Invoice factoring is when a business sells its invoices to a third party and then the factoring company controls the sales ledger and collects the debts. Invoice discounting allows you to draw money against your invoices, however, the business maintains control over the administration of your sales ledger.
Invoice Factoring: Advantages and Disadvantages
- Invoice factoring provides a safe, immediate source of cash flow by releasing working capital that is tied up in unpaid invoices.
- Having a lender collect invoices for you can help you save time spent on administration and chasing late payments.
- Factoring provides flexibility as amounts can expand and contract with your sales volume.
- Invoice factoring companies will verify your invoices with clients to ensure that they are accurate. Including a third party can affect customer relationships and also means that you will have to give up some control.
- If your client has a weak payment history or credit score, it may affect your approval.
- Invoice factoring can reduce the scope of additional borrowing and often has higher costs than a longer-term loan.
How to Apply for Invoice Factoring
After your submission has been processed, our Business Consultant will reach out with the status and timeframe for approval.
Receive Invoice Factoring Fund
Upon approval and your acceptance of the offer, funds are deposited directly into your bank account so you can use the money immediately.