Invoice Factoring which, like a great many trade finance techniques is referred to by several different names, is most commonly referred to as Factoring Invoices and many times as accounts receivable factoring. Factoring Invoices is a financial transaction that is a very common trade finance technique that provides immediate liquidity for companies who are interested in factoring invoices or, factoring accounts receivable in their entirety.
Factoring Invoices is often the perfect solution for companies that need quick cash. Perhaps you need to purchase raw materials, grow your Internet marketing efforts so you can expand, or just increase your working capital so you can offer payment terms to the buyer in an export deal. You can use the cash from factoring invoices for any purpose. Factoring Invoices is not a loan so there is no lengthy application or approval process. You receive the cash almost immediately because it is generated from invoices that are already on your books. Invoice Factoring can be utilized as needed or on a continuing basis.
In the world of global trade finance, Invoice Factoring can be a tremendous advantage to companies who use factoring as a trade funding method to put themselves in a position to offer credit terms to international customers in export finance transactions while still receiving cash when the goods you are exporting are shipped. The offering of credit terms to customers can be a tremendous competitive advantage.
Traditional Invoice Factoring is an ideal solution for companies that need extra cash flow to purchase inventory, invest in marketing, or extend credit terms to the overseas buyer in an export transaction. Companies that factor invoices generate immediate cash entirely from invoices already on your books without having to borrow.
In a typical Invoice Factoring transaction, the finance provider, who is known as the factor, purchases the invoices and advances 70% to 90% of the amount of the invoices within 24 to 48 hours. The factor pays the remainder of what you are owed once the client pays the factor for the outstanding invoices; usually 30 to 45 days later.
Factoring is not the same as invoice financing or invoice discounting, which are both forms of asset based lending. The factoring transaction is technically called an Assignment of Invoices or an Assignment of Accounts Receivable. Factoring is an actual sale of the invoices, as opposed to invoice financing, which is a loan with the invoices pledged as collateral. When you finance invoices you still own the invoices.
The cost of Invoice Factoring is applied by the factor in the form of a discount from the face value of the invoices. In a typical Invoice Factoring transaction, the factor will likely collect the outstanding invoices within 30 to 45 days, or less. With such a limited transaction lifecycle, the discount from the face value of the invoices is nominal compared to the benefits derived from receiving the cash immediately.
An additional but no less substantial benefit is that the invoices are sold without recourse. The factor assumes all of the credit and payment risk in the transaction, so the factor assumes all responsibility for collecting on the invoices.
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Types of Invoice Factoring
Small business owners opt for factoring invoices this way when they do not want to factor all of their invoices. Typically, businesses will want to use spot factoring invoices when they don’t need a steady flow of cash or have varying gross margins where it does not make sense to factor. Unlike traditional factoring, where the company turns over all invoices, spot factoring invoices is available on an as-needed or one-time basis. This flexibility comes at a premium but often makes sense if you have one client that is particularly slow or if a consistent flow of capital is not needed.
Construction finance offers sub-contractors and general contractors access to quick cash from your invoices so you can get the funds you need to start your next project. The financier (factor) purchases construction invoices and advances a percentage—often within 24 hours—then collects the funds and forwards the remainder of the invoice to you, less a factoring fee. Few factoring firms work with the construction industry, but we have direct lines into those that do. We will help you find the financial partner that will provide the best solution for your company’s particular situation.
Export factoring works for companies that want to offer terms to international customers but still want to receive cash when the goods are delivered. The factor or finance company, purchases your receivables and forwards payment, usually 70% to 90%, once it has the receivables documentation. The client pays the factor, not you, once it receives the goods. The factor pays you the balance when it receives payment from the customer, less a small fee.
Medical Services Factoring
Medical Services Factoring fills the cash gap inherent with receivables of third-party payers, such as insurance companies, Medicare or Medicaid. It gives you quick access to funds to pay bills, payroll, and buy equipment. With Medical Services Factoring, you perform a service and send the invoice to the factor. The factor then forwards a percentage of the invoice to you. After the factor collects the invoice from the debtor, you receive the remaining amount on the invoice, less the factoring fee.
Recourse Factoring is appropriate if you have financially healthy clients. You agree to buy back or exchange with other invoices of equal or greater value, noncollectable invoices. Recourse factoring offers lower fee because of less risk.
Factoring invoices on abasis transfers the risk of insolvency and non-payment is transferred to the Factor. The Factor cannot come back to you for payment if the customer fails to pay. The Factor is not required to cover disputed invoices.
Factoring Invoices Explained
A factor is a financial intermediary that purchases receivables from a company. The factor is essentially a financier and funding source that agrees to pay the company the value of their invoices less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately, with the balance paid upon receipt of funds from the invoiced party. Factoring helps a business to obtain immediate capital based on the future income attributed to a particular amount due on an account receivable or business invoice. Accounts receivable function as a record of the credit extended to another party where payment is still due. Factoring allows other interested parties to purchase the funds due at a discounted price in exchange for providing cash up front.
The terms and conditions set forth by a factor may vary depending on their own internal practices. Most commonly, accounts receivable factoring is performed through third party financial institutions, referred to as factors. Factors often release funds associated with newly purchased accounts receivable within 24 hours. Repayment terms can vary in length depending on the amount involved. Additionally, the percentage of funds provided for the particular account receivables, referred to as the advance rate, can also vary. Accounts receivable factoring is not considered a loan because the parties don’t issue or acquire debt as part of the transaction. The funds provided to the company in exchange for the accounts receivable is also not subject to any restrictions regarding use.
Factoring Invoices Glossary
Accounts Receivable are monies which are owed to a company by its customers for products and services the company has provided. Once invoices have been sent to customers accounts receivable become current assets on the company’s balance sheet.
Accounts Receivable Factoring
Accounts Receivable Factoring is a method of Trade Financing whereby a company sells their accounts receivable in exchange for working capital. The purchaser of the receivables relies on the creditworthiness of the customers who owe the invoices, not the subject company.
Asset Based Lending
Asset Based Lending is a method of Trade Financing that allows a business to leverage company assets as collateral for a loan. Asset-based loans are an alternative to traditional debt which is generally characterized as higher risk and provide higher interest rates.
Commercial Finance is defined as the offering of loans to businesses by a bank or other lender. Commercial loans are either secured by business assets, accounts receivable, etc., or unsecured, in which case the lender relies on the borrower’s cash flow to repay the loan.
Factoring is the selling of a company’s accounts receivable at a discount. The lender assumes the credit risk of the debtor and receives the cash when the debtor settles the account.
Receivable Management involves processing activities related to managing a company’s accounts receivable including collections, credit policies and minimizing any risk that threatens a firm from collecting receivables.