(Newswire.net — September 30, 2021) — Is your cash flow suffering because you have a lot of invoices outstanding? If your funds are stuck in the pipeline because of poor follow-up of collection or other reasons, you can choose invoice factoring. Let’s try to define invoice factoring.
Definition:
Invoice factoring is a US Business funding process in which businesses achieve cash flow by selling their outstanding invoices to a third party, such as a factoring company, at a discount. The service can be provided by banks and independent financing agencies.
Invoice Factoring Works as Follows:
The business looking to boost its cash flow enters into an agreement with a factoring company for a fixed period of time. During this term, the company will take charge of the sales ledger, and credit aspects of the client for the term decided. Upon signing the contract, the factoring company will advance some funds upfront (typically to the tune of 70-80 percent of the invoices). When the customer pays up, the funds are collected by the factoring service and sent to the business after deduction of their fees.
What Are The Advantages Of Invoice Factoring?
Invoice factoring is an alternative business funding process that allows your business to unlock and utilize funds locked up in unpaid invoices. You will have a positive cash flow even when your customers are yet to pay. It makes cash management more manageable and allows your business to remain on course to your goals without hitting a financial roadblock.
Invoice factoring service also includes credit control. This means your business need not spend time chasing payments from customers. You can focus on other crucial areas of business management while the factoring company collects the payment for you.
How is Invoice Factoring Different from Invoice Financing?
It is important to note that invoice factoring and invoice financing are two different alternative lending options. While they both are used to manage the cash flow gap problems, the conditions applicable to both situations are different. Invoice factoring is a sale transaction, whereas invoice financing is a business loan.
As a business using this facility, you receive an advance payment for your pending invoices after the factoring company checks the status of your invoice and purchases the receivables. As the receivables are handed over to the third party, you don’t have to worry about collecting your outstanding amounts from debtors. Importantly, as factoring is not a business loan but a type of business funding, you are not required to pay any monthly installments.
The Core Requirements Of Invoice Factoring Are:
- Your business must have other businesses or the government as your clients
- The annual revenue of your business must be more than $50,000
- You expect to receive payment from your clients in 30 to 90 days
- Your clients are reputed and creditworthy
It must be noted that invoice factoring contracts generally require a minimum amount of invoices to be factored every month. If there are fewer invoices, the operational expenses will be on the higher side for the invoice factoring services. The minimum invoice figures are agreed upon at the time of signing up the contract. A higher minimum generally lowers the invoice factoring discount offered.
We live in this digitally developed world, where almost all processes are automated and minimize the impact of human error. So, the way one conducts business and creates invoices has also undergone changes and many processes have been simplified. You can learn more here about Invoice Generators.