What is Invoice Factoring?

What is Invoice Factoring?

If you own a business and your clients take up to 60 days to pay your invoices, you may want to consider invoice factoring. Invoice factoring eliminates the payment wait and gets your invoices paid in a couple of days. This gives you the necessary financing to pay ongoing expenses such as suppliers, salaries and rent.

But invoice factoring is different from most traditional business financing. For starters, it is not a loan, but rather, a sale of invoices. Although it may not be clear at first sight, you can finance your business by selling your invoices.

Basically, when you factor your invoices, you sell them to a factoring company, who pays you for them. When the factor buys your invoices, it’s common that they’ll pay you in two installments. The first installment, called the advance, is provided as soon as you sell the invoice. The second installment, called the rebate, is provided once your client pays for the goods/services.

Lets look at a receivable factoring transaction to see how it works

  • You deliver goods and services to the customer.
  • You invoice the client
  • You sell the invoice to the receivable factoring company
  • Factoring company advances (installment #1) between 70% and 95% of the invoice
  • You get immediate money for your business
  • The customer pays the factoring company
  • The factoring company rebates you (installment #2) the remaining money, less a small fee

As you can see, factoring receivables provides you with accelerated funds that can be used to run and grow the business. Although accounts receivable factoring is a great tool, it only works to solve one very specific problem. That is, that you can’t afford to wait to get paid by your clients. However, it solves this problem better that most other financial tools. Furthermore, as opposed to bank financing, invoice factoring is easy to obtain and can usually be set up in days.

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Invoice Factoring

Need more information? Go to the Factoring Resource Center or to the main invoice factoring page.

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