Business Invoice Factoring

Business Invoice Factoring Basics


 

Business invoice factoring is a financial transaction to relieve a company’s accounts receivable that has tied up working capital because the invoices have not yet been paid. The company has the option of selling their accounts receivable to a business factor; a financial institution that purchases invoices at a percentage rate less than the value of the invoices in order to provide the working capital needed to meet its own financial obligations.

 

The commercial invoice factoring company is not a typical bank in that the accounts receivable purchased is not a long-term loan with expected monthly payments from the company with whom they have contracted. Rather, the factor provides short-term funds based on the invoices purchased. The company that sold the invoices then has monthly working capital. Business Invoice Factoring

 

Meanwhile, the factor collects the invoice payments from the companies to whom the invoices were charged. This transaction proceeds month by month, assuring that the company selling the invoices continually has operating capital to sustain operations and the factor absorbs the responsibility of collection of invoice payments.

 

For this service, the factor charges a fee of three to ten percent. However, the amount the factor originally lends to the company contracting the factoring service is the full face value of the invoices, less their factoring fee, for example five percent, plus an additional amount up to ten percent, or more depending on the factor. Thus, in this example, the total amount loaned to the company selling the invoices is the value of the invoices less 15 percent and this amount is immediately paid by the factor to the company. Once the factor has collected on the invoices, they will pay the company the additional carrying charge of 10%, retaining the 5% fee originally contracted.


 

The factor fee percentage and the additional monthly carrying charge vary from factor to factor and is partly dependent on the financial stability of the company engaging the factor and the factor’s own operating requirements. In this regard, the factor operates very much like a typical banking institution in business-to-business financing, but invoice factoring is really operating more like a revolving line of credit rather than a traditional financial loan. Typically, a factor’s fee is less than the going rate of traditional bank financing, and a company engaging a factor can discontinue the relationship at any time if it feels its cash flow is remaining solvent month-to-month without having to sell its accounts receivable.

 

Advantages of business invoice factoring

 

The primary advantage of business invoice factoring is that a company has the assurance of sufficient working capital month-to-month because their accounts receivable is working for them rather than functioning as a cash flow drain.

 

The company can save on the expense of collection on invoices because the factor takes over that responsibility. Sometimes, a company may decide to continue with a long-term relationship with a factor for that savings alone, which may exceed the cost of the factoring fee, thus increasing the company’s cash flow.

 

Sometimes, a company may be willing to find a factor that will absorb the entire accounting functions of the company, both accounts receivable and payable. Here again, the factor fee may be less than the expense to the company to handle accounting internally. The advantage to cash flow is obvious.

 

For a start-up company, business invoice factoring is particularly advantageous because the expenses of start-up are always going to be a greater, if short-term financial burden with hiring staff, office outfitting, equipment purchases, tooling, etc.

 

The company who engages factoring to assure its cash flow may find that their endeavor is increasing rather than lessening cash flow.