Invoice factoring basically refers to a financing process in which a firm sells its pending invoices to a lender, known as a factoring company. The business forwards the invoice possession to the factory hub in exchange for cash, measured as a percentage of the invoice value.
It enables businesses to get cash flow before making the payment against the goods. The obtained cash can be reinvested to improve the scale and develop new opportunities. One way to secure funds is through invoice factoring loans. Businesses can expect to get up to 95% of the value of the pending invoices. When the remaining balance on the invoice is paid, the factor gives back the payment by deducting some charges.
How does invoice factoring work?
The invoice financing procedure and the invoice factoring process are extremely similar. Regarding invoice ownership and payment collection, the two facilities are different.
Three parties are involved in invoice factoring: the seller, who needs funding, the debtor, who buys the products, and the intermediary, the factoring company, who lends money to the seller.
- To ascertain eligibility, the seller sends the factoring company the account receivables (invoice).
- The credit limit is determined by the financier (depending on the counterparties’ risk profile),
- Gives a portion of the invoice—typically 80%—in advance.
- Take ownership of the invoice, making it the owner of the account receivable on the seller’s balance sheet instead of an asset.
- Takes accountability for collecting payments
- On the due date, the buyer pays the factoring company the outstanding invoice.
- The seller receives the remaining amount from the factoring business less the factoring fees.
Types of Invoice Factoring
There are several types of invoice factoring that include:
Disclosed factoring – The customer is also informed that the company has chosen to use disclosed factoring arrangements. Customers are instructed to pay dues to the factor as they are aware of the factoring agreements. Another name for it is notified factoring.
Non-disclosed factoring- In this case, the company chooses to enter into a factoring agreement with a third party without disclosing this information to the client. The business would receive the payments from the clients and thereafter send them to the factoring in accordance with the terms and conditions specified in the agreement between the business and the factor.
Suppliers Guarantee Factoring- A three-party agreement that includes the borrower’s supplier as an extra party is known as supplier guarantee factoring. Funds generated by factoring the invoices are paid to the supplier directly. In this instance, the supplier provides the raw ingredients for a sizable order. When a consumer pays on time, a factor takes out all fees and charges and gives the client the profit back.
Bank Participation Factoring
This kind of factoring is perfect for companies when every penny counts. The whole deal, including the margin owed to the factor, is financed by the bank.
Benefits Of Invoice Factoring
There are several benefits of invoice factoring for businesses including:
- Better cash flow
- Flexible financing options
- Augmented working capital
- Improved business growth
- Easy access to funds
- Decreased risk of bad debts
- Efficient receivables management
Industries That Benefit From Invoice Factoring
Some of the industries that can benefit from invoice factoring are construction, staffing, oil & gas, truck & freight, manufacturing, food & beverage, etc. Let’s look at these industries in detail below.
- Construction
It doesn’t matter what kind of industry or specialty the construction work is in; examples include HVAC, interior finish, paving, painting, plumbing, structural steel, roofing, flooring, landscaping, asphalt, concrete, demolition, directional drilling, excavation & hauling, and underground utilities. All businesses involved in construction are protected, including general contractors and subcontractors working on any subtrade.
Construction businesses and subcontractors that issue invoices with net terms ranging from 15 to 90 days might benefit greatly from invoice factoring. Businesses that receive a large number of incoming bills and have quick expenses should think about factoring in construction invoices.
- Staffing
Payroll factoring, also referred to as staffing factoring, enables staffing organizations to receive invoice payments in advance. Staffing companies, including those in the healthcare industry, HR consulting firms, headhunters, general staffing agencies, IT staffing agencies, and many more, can use this funding method. These agencies may get payment on a varying schedule and under varying conditions. Due to payment delays, financing may become increasingly challenging for them—especially if their businesses continue to expand. In order to get past their issues with cash flow management, companies turn to the factors for assistance and submit an application for invoice factoring.
Also Read: Asset-Based Financing for Manufacturing
- Truck & Freight
Owner-operators in the freight industry must be able to pay for their overhead. Cash flow is essential for trucking to go without delay. However, some clients do not pay in full until the job is completed, and since invoices are typically used for payments, owner-operators must wait until the payment schedule agreed upon by both the shippers and the owner-operators is released.
- Manufacturing
Manufacturer invoice factoring helps organizations with long payment terms ranging from 30 to 120 days to handle their cash flow and working capital problems. Manufacturing invoice factoring enables businesses to accept new orders and fulfill existing ones.
- Food & Beverage
Different types of manufacturers operating in the food & beverage industry can benefit from invoice factoring. Some of them are animal food manufacturers, dairy product manufacturers, bakery manufacturers, beverage manufacturers, meat product manufacturers, seafood manufacturers, nutritional supplement manufacturers, etc.
The Conclusion
Do you want to know more about invoice factoring for small businesses? Are you looking for invoice factoring loans? Avon River Ventures is a top-notch, independent Venture Funding Group.
If you’re looking to expand your business’s financing options and address cash flow issues, Avon Rivers Factoring may be a good choice.
FAQs
How do factoring rates get determined?
Prime Plus, Flat, and Tiered are the three types of factoring rates that are commonly used. A number of factors are taken into account when calculating factoring rates, such as the volume of monthly invoices, the industry, and client payment patterns.
Does factor invoicing lead to excessive debt?
Invoice factoring doesn’t add to your debt load on your balance sheet like a loan does.
Does factoring invoices affect a company’s credit score?
No, is the response. Because invoice factoring does not result in debt for your business, it has no negative effects on your credit score. As a matter of fact, factor invoicing can raise your credit score because it will free up cash for you to pay your typical financial obligations.