All the Essential Facts About Invoice Factoring
When your company needs short-term cash flow solutions, there are lots of options to explore. One solution that may be available to you is invoice factoring. Before you decide the best way to improve your cash flow and get back on track to achieving your financial and operational goals, you should make sure you know everything you need to know about invoice factoring.
What Invoice Factoring Is
Invoice factoring is a way for businesses to finance when they invoice businesses (B2B) or government entities (B2G). The benefit of this approach is that the company gains working capital by assigning invoices to a factor. The factor assigned gives the company approximately 80% of the value of the invoice. Once the invoice has been paid by the business or government agency, the factor pays the remaining balance, minus whatever fees are accrued. This approach is often used to solve cash flow problems in businesses as a short-term solution.
How Invoice Factoring Works
There are five steps in invoice factoring:
- The client is invoiced with terms of between 30 and 90 days.
- The company sells the invoice to a factor.
- The factor gives the company approximately 80% of the invoice.
- The client pays the entire invoice to the factor.
- The factor pays the company the remaining balance.
What You Need to Know about Invoice Factoring
There are qualifications for invoice factoring. In addition to invoicing businesses or government agencies, your business should be free from legal or tax problems. In addition, the invoices must be payable within 90 days and free from other loans. Some factors may have additional requirements that need to be met by your organization to qualify for invoice factoring. It is important to note that, in addition to fees set by factors, there is a cost involved with invoice factoring. The cost is dependent on the discount rate as well as the length of factoring period.