Invoice Factoring Explained
Invoice Factoring is when a business sells unpaid
accounts receivable invoices to a specialized financial institution
called a Factor. The factoring company buys the invoice from the
business for an amount less than its actual face value, then later
collects the full amount of the invoice from the account debtor
when it finally comes due. This service is useful to a business
that cannot afford to wait 30, 60, or 90 days to collect payment
from customers, cash is needed immediately for growth or survival.
When a business delivers goods or services to another business,
an invoice is generated stating the amount owed and the terms
(number of days) in which the invoice must be paid. This invoice
along with its terms becomes an accounts receivable: money owed
to a business, from a business, for goods or services delivered.
The terms for these invoices are usually 30, 60, or even 90 days.
After the business sends out the invoice it must wait the length
of the term (or longer) to collect the debt and recognize the
revenue generated. Waiting for these long billing cycles to close
can be difficult for a company that is growing fast or just struggling
to survive.
Rather
than waiting for long billing cycles to close, a business has
the option to sell some or all of its outstanding invoices to
a Factor (for a discount) and receive funding within 24 hours
or less. The Factor will eventually collect the full amount of
the invoice from the account debtor.
The
funding from the Factor happens in two parts. 1) The business
will receive an advance between 70% and 90% of the invoice amount
sold to the Factor. 2) When the Factor collects the full amount
of the invoice from the account debtor, the business will receive
the remainder of the advance minus the factoring
fee.
 Although
largely unknown, the Factoring industry is quite large (with over
$200 billion factored in 2001) and has been used as a financial
service by multi-billion dollar corporations for many years. Only
over the last several years has this service been made available
to small and medium sized business as an alternative to traditional
bank financing, which generally requires at least two years in
business with a profit, leinable assets and personal guarantees.
Many
new and growing companies have trouble receiving traditional bank
financing due to profitability, years in business, and financial
strength. Factoring allows these companies to take advantage of
their outstanding invoices to raise cash without incurring any
additional debt. Factoring is not a loan!
Learn more about the benefits here.
© 2005 Invoice Financial
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