What is Invoice Factoring and How Does it Work?

If you have been searching for a quick and easy way to finance your business activities, invoice factoring may be the best solution. Invoice factoring (also known as debt factoring, accounts receivable financing, and under other names) is a quick and easy way to get the cash you need to keep your business afloat. This is especially true if you are facing serious liquidity issues.

Invoice factoring

What Is Invoice Factoring?

Invoice factoring is a kind of financing arrangement that is available to businesses that are able to provide certain goods or services to other businesses (in the form of a B2B arrangement) or to agencies of the government (B2G).

The basic idea is that these businesses are able to sell their invoices that are due in the future to a factoring company. This factoring company then pays the business about 80 percent of the value of the invoice upfront, with the remaining 20 percent coming after the invoice has been paid. Of course, a fee for the service is also involved.

How Does Invoice Factoring Work In Practice?

To begin with, you send your selected invoices to a factoring company. Once you have done so, the factoring company will then do a quick check on you financial and credit status to determine whether or not your business qualifies for factoring. If you get approved, the company will have you sign a special financing agreement that lays out the terms of the factoring arrangement.

Should you agree to this factoring arrangement, it will set in stone a number of crucial conditions. For example, the arrangement will set an initial maximum figure on the total amount of money that you can borrow.

The agreement will also normally make very clear which invoices from which clients you are allowed to have factored. As time goes on and you develop a relationship with your chosen factoring company, more clients can be added to your “green list.”

Your Factoring Company Will Give You An Advance Rate

The factoring company will then give you an advance on your receipt. This is known as an advance rate. As noted above, the total amount is generally somewhere in the neighborhood of 80 percent of the total value of the invoice. After your business had received the advance for the invoice, the factoring company will normally send a “notice of assignment” to the client whom you have chosen.

This notice basically serves notice that you have assigned the factoring company the status of being the entity that will receive all future payments for invoices that you are owed. For example, if the factoring company should receive payment on an invoice from that client that you did not choose to have factored, they must legally surrender that payment to you.

The Factoring Company Will Pay You The Reserve Amount

If all goes well, the client that you have selected for invoice factoring will then pay the invoice within a period of 30, 60, or 90 days, as stipulated by the terms that are given to them by the factoring company. After the company receives the full amount of the invoice from your client, they will then give you the remaining amount of the invoice, minus any previously agreed upon service fees. This remaining amount is known as the reserve amount.

Invoice Factoring Is Quick, Cost Effective, And Convenient

If you’re wondering why so many businesses have recourse to invoice factoring, consider this: Your business may be up to its neck in invoices. The total number of unpaid invoices may be choking off your cash flow, rendering you unable to embark on new and important projects. By delegating debt collection to a qualified expert, you buy yourself crucial time to concentrate on the day to day operations of your business without having to worry about when the profits are coming in.

Where Can You Go For More Information Concerning Invoice Factoring?

Although it sounds complex and involved, invoice factoring is not a hard concept to master. It’s even easier for a business to participate in than talk about.

There are plenty of online resources that you can turn to find out more information about invoice factoring. You can log on to https://factorfinders.com/invoice-factoring-services for an excellent explanation of whatthe process entails and how Factor Finders invoice factoring services work.

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