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. You receive the remaining balance once your customer has paid minus low-cost fees.
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.
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