Invoice factoring provides much needed cash flow
Invoice factoring is the practice of selling the interest in receivables or invoices to a third-party, or “factor,” at a discount. By factoring receivables a company can leverage the value of its receivables by collecting the funds from the factor well in advance of the payment by its customers. Factoring receivables allows a company to reduce payment turnaround by 30-45 days.
Invoice factoring is the practice of selling the interest in receivables or invoices to a third-party, or “factor,” at a discount. By factoring receivables a company can leverage the value of its receivables by collecting the funds from the factor well in advance of the payment by its customers. Factoring receivables allows a company to reduce payment turnaround by 30-45 days.
An example of a factoring transaction may occur as follows:
A factoring agent may purchase invoices from a particular company the face value of which is $100,000. Immediately, the factoring company will provide the company with $80,000 or 80% of the value these receivables. The factor then bills the invoices, collects the revenue and then returns between $16,000 – $18,000 to the sourcing company. The cost to the company, then, is approximately 2-4% of the original invoices but the benefit is having cash-in-hand quickly.
Large corporations have been factoring receivables for many years. It is only recently that smaller businesses have had this funding mechanism available. Banks may be reluctant to provide capital to a company without substantial assets. The practice of invoice factoring enables smaller companies to leverage the booked value of receivables without incurring debt.
Factoring receivables allows these companies to convert their accounts receivable into instant cash. Once they have delivered a product or service and generated an approved invoice, they can get their money in as little as 24 hrs. Factoring receivables can help a company stay current with its vendors and meet other financial obligations such as payroll and taxes.
Other types of financing generally require two years in business and showing a profit. Factoring receivables does not have this limitation. Young, growing companies or those with tax liens and even bankruptcy can still qualify for accounts receivable purchasing lines.
A company may be interested in factoring receivables in order to take advantage of opportunities that require immediate cash. Some companies may want to fund some operational expense while others may want to invest in an expansion project that would ordinarily be delayed. No matter what the reason, it is extremely helpful for a company to know that by factoring receivables it is possible to reap the benefits of sales now, rather than later.
During these economic times, business owners that are feeling the cash squeeze may want to consider invoice factoring to convert receivables quickly into sorely needed cash.
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