Invoice factoring, also termed invoice discounting, is the purchase of accounts receivable in order to obtain immediate working capital. This transaction improves cash flow and allows companies to use the working capital that they’ve earned right away.
Financing and funding companies that specialize in factoring are known as ‘factors’.
With invoice factoring, your company is essentially borrowing cash for a short period of time against your sales invoice. The sales invoice is used both as collateral and as proof that the funds will be repaid at a later point.
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The Basics of the Invoice Factoring Process
The invoice factoring process is fairly simple. Factoring companies buy invoices for products already delivered and/or for services that have already been rendered. Once the factor receives a copy of an invoice, a few simple steps complete the transaction:
The factor processes the invoice. A portion of the invoice amount (usually 70 – 90%) is deposited into the customer’s account.
The customer directs payments on the invoice to the factor.
The reserve amount is released back to the factoring customer, minus a factoring fee after the customer pays the invoice.
Why Factor?
Reasons companies choose to factor include:
Slow paying customers: In order to grow, your company needs to take on new clients and some amount of risk. Furthermore, in some industries invoices are paid 30, 60, 90, or even 120 days after billing. If your company is small, or if the invoice was large, this delay can have an especially dramatic impact on your ability to meet payroll and operating costs.
Insufficient credit for a bank loan: If your company needs a temporary income boost (for example, if you are new and have billed your first few customers), your company will probably not have established enough credit to qualify for a bank loan. Likewise if your business went through a rough patch and has poor credit.
Seasonality: Factoring is a popular option especially in industries that experience seasonal dips and spikes in business.
What are the Benefits of Invoice Factoring?
Invoice factoring is a popular option for funding. Companies like EZ Invoice Factoring work hard to understand where your company needs help, and meet you on terms that you’re comfortable with. Some additional benefits of factoring include:
- Invoice factoring does not have a negative impact on your balance sheet.
- The most experienced factors will allow a company to choose the amount and length of time they want to factor for, in accordance with company needs.
- When you apply to work with a factor, your company’s financial standing is considered but because your customers will be paying the factor, their creditworthiness holds more weight.
- Invoice factoring can be confidential to protect the company’s relationships with clients and suppliers.
- ou will receive back-office support and assistance with billing and collections.
What Industries Use Factoring Services?
Invoice factoring can be beneficial for any company in any industry. Currently, EZ Invoice Factoring specializing in working with the following:
