What do you mean by invoice factoring?
Invoice factoring is a kind of invoice financing in which you “sell” all or most of your firm's outstanding invoices to a 3rd party, thereby improving the cash flow and revenue stability. A factoring organization is responsible for paying you most of the invoiced amount instantly and then taking money from your customers. The two other terms for invoice factoring are accounts receivable factoring and debt factoring.
What is the process of factoring?
Invoice factoring involves trying to sell the direct authority of your accounts receivable, either partially or entirely. It works as follows:
- You usually offer goods or services to your customers.
- You bill your customers for the goods or services you provide.
- The raised invoices are “sold” to an invoice factoring company. After verifying that the invoices are valid, the factoring company instantly pays you the majority of the invoiced amount, which includes 80-90 per cent of the value.
- Your customers make direct payments to the invoice factoring company. If necessary, the factoring company pursues invoice payment.
- The factor companies pay you the remaining invoice amount minus their fee when the invoice is paid in full.
When should your company consider using factoring?
When your firm routinely has a large number of outstanding invoices and your cash flow suffers; as a result, invoice factoring should be used. Assume your business offers a 30-day payment schedule. Almost all of your debtors will make a payment within 30 days – some might need chasing, while others will not – whereas others exceed the limit and necessitate more continual effort. You may have a 30-day chunk of revenue that happens to represent the majority of your future cash flow, but you can't make use of it. You can get that cash instantly, or at least a large portion of it with invoice factoring. You could put that money towards:
- Bridging of short-term expenses.
- Paying back a loan.
- Profit from seasonal business opportunities.
- Or for any other reason where cash flow would otherwise be a constraint.
Benefits of Factoring
Cash flow is now better and more predictable. You can have the majority of your invoices paid just about instantaneously with the help of invoice factoring rather than waiting for the money to arrive. It improves business planning and forecasting and lets you maximize opportunities that would otherwise be out of reach.
Improved chances of survival
Increased cash flow improves your company's chances of survival. Many businesses fail due to insufficient cash flow, and invoice factoring can help you avoid this fate if you use it wisely.
