Business Credit, Accounts Receivable Factoring

How Invoice Factoring Works

Posted by Factor Funding Co. on April 24, 2012

How Invoice Factoring Works

Invoice factoring is a quick, interest free way for small business owners to increase their cash flow. Rather than taking out a bank loan factoring allows companies to get early receipt of their outstanding payments without having to take out a new line of credit or borrow any capital. Factoring is also flexible since it varies based on the amount of invoices you send out each month. This means that your access to cash actually grows with your business. Learning how factoring works can help you decide if this program is right for your company.

Benefits of Invoice Factoring

Invoice factoring offers many benefits for companies. For one thing, the service allows you to get faster access to your outstanding payments. Instead of having to wait 30 to 60 days to receive money from a customer you can get your money in as little as 48 hours when you use invoice factoring. Another benefit of factoring is the fact that you get to relinquish your accounts receivable duties for the invoices you sell to the factoring company. Instead of you having to follow up on those outstanding invoices the factoring company will do so for you.

What's Involved in the Factoring Process

In a nutshell, invoice factoring involves you selling the value of your invoices to a third-party company that then advances you the bulk of the money that you're due. The exact amount of your advance typically depends on the creditworthiness of your customers. After the company sends you the money, the staff will begin collecting on the invoice. Once your customer pays off the invoice, the factoring company will send you the rest of the money after subtracting their fee.

Factoring Advances and Fees

Typically, a factoring company will advance a maximum of 90 percent in the initial payment. Many companies will qualify for less than this but those with reliable customer payment records may receive the maximum advance possible. Usually, advances will be at least 60 percent. The fees factoring companies charge vary widely depending on the firm so it's best to shop around before committing to one company. Generally, the average fee structure ranges from 1.5 to 12 percent. Most factoring companies decide on your fee using several factors, including the length of time it takes your customers to pay and the total amount of invoices you will be factoring.

If you need a faster way to receive your customer payments, invoice factoring may be just the solution you've been searching for. Signing up for a factoring plan can help your company keep up with necessary expenses in between invoice payments.

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