Invoice factoring is a financial transaction and a form of debtor finance where a business sells their receivable account, that is, invoice to a factor (a third party) at a discount. In other words, it is the process of selling account receivables at discounted rates thus giving the factor the rights to receive the payments for the invoices until the amount is fully settled.
As a business owner, at times, you might need to factor the receivable assets of your company to meet both your immediate and present needs. You might also need to factor these invoices to mitigate the credit risk. Often referred to as accounts receivable factoring, invoice factoring describes asset based lending that involves utilizing your company’s accounts receivable as collateral.
Invoice finance factoring is a way for businesses to borrow money against the amounts due from customers so as to improve the cash flow of the business, pay its employees, suppliers and at the same time reinvest in business operations and growths even before their customers are able to pay up in full.
An agreed amount which is often a percentage of the invoice amount is paid by these businesses to their lenders as a fee for borrowing the money.
This invoice finance factoring helps businesses solve the problems of unavailability of income often due to the failure of customers to pay on time and also difficulty when obtaining other types of business credit.
How It Works
Invoices are often purchased by financing companies in two installments. The first installment; the factoring advance covers up to 80% of the amounts receivable. As soon as the money is received from your customers, the remaining 20% is paid. To apply for invoice finance factoring, there are certain steps that should be followed. These include:
Finding A Factoring Company:
Before you can begin factoring your invoice, you have to have a factoring company. As such, the first step is to find a financing company that meets your financing needs. These services are provided by quite a number of companies in a variety of industries. As such, all you have to do is find a factoring company that has experience in your field (industry).
Hence, you should evaluate your options and choose a company that matches your needs and is guaranteed to provide you with the best service possible. The factoring company you choose also must have worked with customers that are similar to yours.
Setting Up A Factoring Account:
Once you have chosen a factoring company, the next step is to set up a factoring account with the factoring company you have chosen. As such, all legal documents and contacts must be reviewed. Once these are signed, the factor thus finishes its due diligence, files a UCC statement and then sends a notice of assignment.
Depending on the circumstances of your business and how much is needed, the account setting-up process could take around one day to three days before it is finally completed. This account allows the factoring company to begin providing services to your business.
Getting Your First Funding:
After you have set up your factoring account with the factoring company, you are ready to get funded. Usually, companies sell their receivables to the factor by submitting]a schedule of accounts to them. This schedule of accounts lists the invoices you intend to sell.
On receiving this schedule, the invoice is then verified and an advance is sent to you. This advance is dependent on the industry or field of your company; usually it ranges between 70-95% of your invoice’s gross value.
These funds may be gotten via direct deposit also known as ACH. An ACH may take between one or two days to clear your bank account. However, if the funds are needed much sooner, ask for a wire transfer, a wire transfer is usually cleared between one day or less.
Getting The Rebate
The factoring rebate often settles the transaction. The rebate is the second installment of the transaction and is usually the rest of the 5% of the 30% of your invoice and like the first payment is usually dependent on the size of your initial advance.
This rebate is handled by factoring company and is paid usually as soon as your customer pays in full, settling the full invoice amount. Other times, they could be paid on an agreed schedule which could be weekly or monthly.
Invoice finance factoring is usually done my companies regularly, especially those companies who often face late payments from their customers. As a result, the process of invoice financing factoring provides them with a continuous, predictable cash flow through a relatively simple and easy process.
If your company falls into this category, invoice finance factoring is a stable income source that could be used to ensure that your company has enough funds to effectively run its operations. It is relatively simple as you can continue to use your already existing factoring account. All you have to then do is factor your invoices and submit your schedule of accounts. Once the factor processes this invoice, you get an advance. And once your customers pay, the account is settled by the factor and you get your rebate.
Benefits Of Invoice Finance Factoring
There are quite a number of benefits which makes invoice finance factoring preferable over other credit policies. These benefits include:
- It allows for an unlimited extension of your business working capital as it depends on sales turnover rather than asset capabilities.
- It eliminates the worry over debt repayment.
- It is much more affordable as it has lower interest rates.
- There are no spending restrictions on the amount received.
Rather than having to face the long process of applying for business credits and loans, invoice factoring is a quick and easy way of getting the funds you require for running your business. All you have to do is submit your invoice for purchasing, after which the factor (your factoring company) pays you an advance, a rebate which settles the factoring process is paid once your customers pay up.