What Does Factoring Mean in Finance?
Invoice factoring is a form of financing that businesses can use to improve their cash flow. When businesses factor invoices, they sell them to a factoring company at a discount in exchange for immediate payment. This allows businesses to get access the money they're owed right away, rather than waiting for their customers to pay.
What is factoring then? In short, it is business financing based on the value of accounts receivables. Factoring can be a good option for businesses that need cash quickly, but it’s important to understand how factoring works before signing up for a factoring agreement. In this article, we will provide you with a quick overview of factoring and how it can be a potential lifeline for any business that needs to supplement its cash flow.
How Does Accounts Receivable Factoring Work?
Small and medium-sized businesses that invoice customers may find it difficult to meet their financial obligations while waiting for customers to pay their invoices for products or services rendered. That’s where a factoring company comes in.
Businesses can partner with a factoring company to increase liquidity by selling their accounts receivable. Factors purchase outstanding accounts receivable, which essentially functions as an immediate invoice payment. The factoring company collects a small fee and forwards up to 90% of the outstanding invoice total to the business so they can use it to meet their financial obligations. The factoring company then collects the outstanding invoices and remits the reserve to their client. The reserve of 10% (in the case of a 90% advance) is held to protect the factor from potential discounts taken by the business.
Is Invoice Factoring Advantageous?
Many small businesses and growing enterprises find invoice factoring to be highly beneficial. Companies in specific industries that rely heavily on invoicing customers find factoring to be helpful; it increases their working capital and offers favorable credit terms as well as reasonable fees and payment terms for the cash advance invoice payments.
Some factoring companies will also provide collection service, which means that businesses don’t have to chase customers down for non-payment of their invoice amount when they opt for factoring. Similarly, some factors will insist on collecting the unpaid invoices as part of the factoring agreement.
Accounts Receivable Factoring Is Not a Traditional Business Loan
Many businesses may have poor or unestablished credit—disqualifying them from conventional business loans. Yet, these businesses depend on adequate cash flow and working capital to operate their business. Invoice factoring provides a convenient and affordable way to increase that working capital. Most factoring companies offer favorable terms. Some businesses opting for long-term factoring agreements to normalize their cash flow.
Factoring – Key Takeaways
Businesses that rely on invoices to fund their business can benefit from accounts receivable factoring. Invoice factoring allows businesses to access the cash from some or all of their accounts receivable before the customer has paid according to their payment terms. For a small fee, a factoring company provides a portion of the invoice amount in advance and then collects payments from the business’ customers.
Find Financial Flexibility with Factoring from Accord
If you’re interested in factoring, AccordExpress Factoring, or accounts receivable financing, contact Accord Financial to learn more about our factoring facility and funding solutions for businesses that sell on terms. Our factoring services can provide you with the cash you need to keep your business running smoothly. Contact us today to learn more about how we can help your business grow.