What Is Invoice Factoring?
Account Receivable Factoring is another term for Invoice Factoring: A type of invoice financing in which you sell a portion or all your business’s outstanding invoices to a third party as a means to increase cash flow and income stability.
With invoice factoring, the business would sell their accounts receivables to improve their working capital, which would give the business instant funds which could be used to cover business expenses.
The company gets the rest of the value of the invoice as a third-party factoring company collects payments from its customers. A factoring company pays most of an invoice upfront to a business, with the balance being paid when the invoice is paid by the customer, less their fee for the factoring. Only companies who issue invoices to customers are eligible to receive a factoring loan, so the factoring process begins when your company does business with the customer.
In businesses that are eligible, working with a factoring company effectively sells payments that you are owed on unpaid invoices, and transfers your risk to the factoring company should your clients make a late or default payment on an invoice.
Larger companies typically prefer to use recourse factors, as they can afford to return funds that they received by selling the outstanding invoices back to the factoring company should their client not make a payment.
Most factoring agreements contain a restitution clause, meaning that a firm that sold an invoice is required to pay back part or all an upfront cash payment if a customer does not pay. If an invoice goes unpaid, unless there is a no-recourse clause, the selling company generally must pay back the factoring company for any advance cash.
Known as a discount rate, a factoring fee is what you pay to borrow money from a bill financing company. Factoring fees, both fixed and variable, generally range between 0.50 percent and 5% for each month that an invoice remains unpaid.
Once a factor has collected from your final client under the standard terms for payment, it releases the rest of the invoices value back to you, less a small factoring fee — usually between one and five percent.
Once you are approved to work with a factor, you can sell off your unpaid receivables to increase working capital and avoid delays from longer-term payments.
With a factoring agreement, you typically factor every approved invoice sent to approved customer companies, no matter the amount of credit outstanding on your business. While factoring generally allows you to borrow against any unpaid invoices that you send to approved clients, invoice financing for small businesses has an underwriting processthat is far more similar to traditional lending products.
Instead of offering a term loan, which is a lump sum, factors will essentially buy the invoices from your company. The invoices themselves serve as collateral, so you do not need to worry about providing property, equipment, or other expensive forms of collateral.
Invoice Factoring Australia wide is one of the easiest types of funding for businesses to qualify for, and it allows you to receive cash very quickly — far quicker than most customer companies will pay out on invoices. While invoice factoring involves higher interest rates than many other types of business funding, the right factoring company can be an excellent partner in giving you fast access to the cash you are already making on work that helps you run and grow your company. Invoice factoring, also known as Account Receivable Factoring, gives small businesses a way to access working capital quickly by turning unpaid client invoices into cash.
A factoring provider makes an offer on your customers invoices, giving you access to much of your invoices cash value instantly, instead of waiting weeks or months for payment. Once you have your factoring arrangement set up and your customers keep paying on time, this process can be repeated over again, maximizing your cash flow and growing your company. After verifying your customers creditworthiness, a factoring company advances as much as 100% of your invoice, providing you with immediate cash flow for use on business needs.
Invoice factoring involves selling your unpaid invoices to a third-party company so the company can increase cash flow, either to finance operations or to pursue growth opportunities. To maintain bill payments and payroll funding, a business-to-business (B2B) business may seek invoice factoring, even if the company has limited credit or poor credit. Instead of working with banks or lenders, a small business owner can partner with a third-party called a factoring company (also known as simply factoring) to access funds by factoring unpaid invoices.
Your small business accepts these terms, then the invoice factoring company says it will pay you $24,000 in total for your accounts receivable. Assuming that the creditor gets all the money it is due on the outstanding invoice, then it sends the remaining 15% to 30% of the invoice amount back to the business, with interest and/or fees paid by the invoice factoring business.