Invoice factoring is a type of debt financing in which a business sells its account receivables to an invoice factor at a discount. Invoice factoring works best where a business wishes to meet its immediate cash needs but can’t process the payments within a short period of time on its own. In most cases, businesses involving a contract of some kind resort to invoice factors for quick cash since their invoices take relatively long to get processed.
Also known as accounts receivable financing, invoice factoring is best associated with asset based lending using the borrowing company’s account invoices as the collateral. So, what is the difference between bank loans and invoice factoring? In the former, banks assume possession of a collateral item until you pay back their loans. However, invoice factoring is more of a transaction as opposed to a loan. The accounts receivables are usually sold at a discount to the lender in exchange for immediate cash.
The main advantage of factoring is the speed of receiving the cash. Take for instance in construction contracts where payments take long to be processed. The contractors may sell their contracts at discounts and receive payments upfront from the invoice factoring companies. Receiving cash upfront on the other has a lot of benefits to you as the company. For instance, you are able to offer your services freely without worrying about cash problems.
Sometimes invoice factoring may also be referred to as invoice discounting or debtor financing. These companies however do not just accept to buy any type of invoices. They do thorough research about the project’s owners and their credit reports before accepting to transact with the contractors. Sometimes the invoice factoring companies also offer non-recourse factoring. This is an important insurance in scenarios where the business’s client gets insolvent before the transaction deal is sealed.
So, for any businesses that feel shy to look for conventional loans, or business which just need quick cash as they go on with their normal businesses, invoice factoring can be a great option for them. And actually almost any business can resort to invoice factoring to get urgently needed cash. However, the construction, distribution, transport, staffing and importation are some of the most common businesses that tend to seek financial assistance from these lenders. Finally, the fact that invoice factoring companies can today offer financing of up to 90% of your accounts receivable is a reason to love their services.