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Invoice factoring is a financing option available to businesses that invoice businesses (B2B) or government agencies (B2G). Invoice factoring provides short term working capital in exchange for selling and assigning invoices to a factor. The factor advances the company roughly 80-90% of the invoice’s value. Then, once the invoice is paid by your customer, the factor pays the remaining amount to you (minus fees).
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. This type of financing is a great funding option that provides for faster business growth.
Let’s say Jane owns a clothing manufacturing business and is hoping to steadily increase inventory throughout the year. In order to afford these costs, Jane decides to work with an invoice factoring company with her outstanding invoices that are due in 30 days. She agrees to a recourse invoice factoring contract of $10,000 with a discount fee of 1.5% per month. She will receive 80% up front and the remaining reserve once the invoices are fulfilled successfully.
In this example, Jane would receive $8,000 as the advance, pay $150 (1.5% of $10,000) as the discount fee, and would eventually receive the remaining $1,850 as the reserve once the invoice is paid by Jane’s customer.
Invoice Factoring Terms and Features
Terms and features of invoice factoring contracts vary between business owners, industries, and factoring companies, but here is a glance at the average terms and features.
|Invoice Due Date||15 – 90 days|
|Amount||Up to $100 million|
|Advance Rate||80% – 90% of invoice|
|Reserve Amount||10% – 20% of invoice|
|Discount Fee||1.95% average monthly|
|Funding Time||1 – 3 days|
How to Qualify for Invoice Factoring?
Qualifying for invoice factoring is quite simple. While some factoring companies require that businesses have fair to good credit and at least one year in business as a corporate entity (i.e., corporation, LLC, etc.), most factoring companies are flexible with these requirements. The most important criteria for factoring companies are who is paying the invoices and when they are due. Invoices generally must be with businesses (B2B) or government (B2G) customers (as opposed to consumers) with good credit history. Invoices also must be due within a reasonable amount of time (usually 30-90 days). In addition, the invoices must be free of any liens or encumbrances. That means a business owner can’t use the same invoices as collateral for a different loan unless a subordination agreement is in effect.
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