What is Invoice Factoring?
Invoice Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. It might also factor their invoices to mitigate credit risk. Factoring is commonly referred to as accounts receivable factoring, invoice factoring and sometimes erroneously accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset-based lending (ABL) using a company’s accounts receivable as collateral.
How is Invoice Factoring Different from a Bank Loan?
Factoring differs from borrowing in that the accounts receivables are actually sold rather than merely offered as collateral. The net result is that your company can convert its receivables into immediate operating cash so that you will not have to wait a duration of 30, 60, 90 days or more for your customers to pay.
This process places the time, cost, and effort of the collection into the hands of the factoring company, allowing you the time to concentrate on what you do best – run your company. Your business receives the cash it needs, when it needs it, allowing you to best manage your business.
Invoice factoring can be a great option for companies that need money quickly, but who aren’t able to secure a conventional, bank loan. Business factoring is known by several names. Receivables factoring, invoice discounting, invoice factoring and debtor financing are other commonly used names.
Good factoring companies will research the credit history of the seller’s customers prior to purchasing the invoices. They will want to be confident that these companies have a history of paying their bills. They will also provide non-recourse factoring. Non-recourse means you are protected in the case of your client going insolvent during the transaction period.
Factoring is a way for companies to infuse cash into their business without taking on additional debt. By selling their accounts receivables at a discount, they can get money right away without having to wait to collect it themselves. Receivable finance is a great funding option for most industries including trucking, staffing, distributors, and importers.