Invoice Factoring is a financial transaction whereby a business sells its accounts receivable (invoices) to an Invoice Factoring Company at a slight discount.
The Factor provides financing to the seller of the accounts in the form of a cash “advance,” often 75-92% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor’s discount fee (commission) and any other charges, upon collection.
Factoring differs from a bank loan in several ways. The emphasis is on the value of the receivables, whereas a bank focuses more on the value of the borrower’s total assets, and often also considers, in underwriting the loan, the value attributable to non-accounts collateral owned by the borrower. Such collateral includes inventory, equipment, and real property.
While typically more expensive, Factoring is much easier and faster to obtain than a bank loan. Funding can happen in as little as 48 hours. A big difference in Factoring versus a bank loan is the formula used to compute working capital availability. Many times an Invoice Factoring Company can advance 2-3 times as many funds as a bank can as they are relying on the creditworthiness of the company’s customers.
So to wrap up what Factoring can do for you. You can use factoring to:
- Get money quickly
- Head off bad debt before it happens (defacto credit department)
- Avoid the hassle of collecting bad debt
- Smooth your cash flow
- Take on larger projects