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What is Invoice Factoring?

Invoice Factoring is a financial transaction and a type of debtor finance. In an invoice factoring agreement, a business sells its accounts receivable (invoice) to a third party (called a factor) at a discount. A company will often factor its receivable assets to meet its present and immediate cash needs versus waiting for payment based on original contract terms. Factoring invoices is also used to mitigate credit risk.

You may also refer Factoring as accounts receivable factoring, invoice factoring, and sometimes erroneously accounts receivable financing. Accounts receivable financing is a form of asset-based lending (ABL) utilizing a company’s accounts receivable as collateral.

The Factoring Process Explained

The Factoring Process

How Does Invoice Factoring Work?

Step 1: Your B2B or B2G company provides goods or services to larger creditworthy customers and submit correct invoices.

Step 2: Your company needs to be paid sooner than agreed terms(ie, 30-90 days) with your customers.

Step 3: Your company sells its unpaid invoices to an invoice factoring company per a factoring agreement.

Step 4: The factoring company verifies the invoices are valid with the B2B or B2g company receiving up to 90% of the invoice amount. Once the account is set-up payment can be as fast as 24 hours.

Step 5: The larger credit worthy customers make payment directly to the factoring company according to the terms of the invoice. The factoring company then pays the balance of the invoice back to the B2B or B2G company minus a fee.

How is Invoice Factoring Different from a Bank Loan?

When understanding invoice factoring, it is essential to remember that factoring differs from borrowing in companies sell accounts receivables rather than merely serve as collateral. The net result is that your company can convert its receivables into immediate operating cash. That way, you will not have to wait 30, 60, 90 days or more for your customers to pay.

Non recourse factoring offers the added benefit of protection against insolvency or bankruptcy. Only the best, most experience factoring companies are able to offer non recourse to their customers. This is especially important in today’s economic environment of uncertainty. Expect the unexpected as business owners must be diligent in protecting their own interests and livelihoods.

The factoring process places the time, cost, and effort of the collection into the hands of the factoring company Factoring allows you the time to concentrate on what you do best – run your company. Your business receives the cash it needs when it needs it, so you can best manage your business.

Invoice factoring can be an excellent option for companies that need money quickly but who aren’t able to secure a conventional bank loan. Many refer to business factoring by several names such as receivables factoring, invoice discounting, invoice factoring, and debtor financing.

Good factoring companies will research the credit history of the seller’s customers before purchasing the invoices. Factors will want to be confident that these companies have a history of paying their bills. The factor will also provide non-recourse factoring. Non-recourse protects your company in the case of your client going insolvent during the transaction period.

Fully understanding invoice factoring is a great way for companies to infuse cash into their business without taking on additional debt. By selling their AR at a discount, they can get money without having to wait to collect it themselves. Receivable finance is a great funding option for most industries, including trucking, staffing, distributors, and importers.

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