Invoice factoring involves the sales of unpaid invoices by a business to the factoring company. Consequently, the factoring company, who is the lender, collects payment directly from the business’ customers. Borrowers also tend to receive between 60 and 95% of the invoice value and not the entire amount.
Invoice factoring has become increasingly popular in recent times as businesses look to cater to their financial obligations. For business owners that remain skeptical about this funding option, particularly when compared with other options, the write-up about invoice factoring financing is explained in terms that can be easily understood. This should also make the decision making process for business owners seeking for funds.
Invoice factoring can serve as an amazing tool to businesses, helping them to get paid faster for work they have already delivered. However, invoice factoring is not as easy as it sounds – trading in unpaid invoices for discounted payments.
Steps in Invoice Factoring
One of the most important aspects of invoice factoring is going through the process as this could make or mar the entire fund sourcing venture.
Step 1: Finding a Factor – the amount and frequency of invoices to be sold should be considered when choosing a factor. The invoice factoring agreements should also be thoroughly assessed to avoid paying extra fees if the terms are breached.
Step 2: The Factor Agreement – Before signinga factoring agreement, it is extremely important to ensure that the agreement outlines any fees, details of the payment plan, and the initial maximum dollar amount to be received. Borrowers can consult a lawyer that specializes in small business finances to go through the agreement paperwork to be fully aware of the terms.
Step 3: Assigning the Factor – Once the agreement has been signed, the factor gives the borrower an advancement called the advance rate, usually around 80% of the total invoice value. Factoring companies often send out a “notice of assignment,” informing customers of the business of how to send future payments from invoices issued from business.
Step 4: Collection and Payment – Once the deadline passes and clients pay the factor, the factoring company sends business the remaining balances, known as the reverse amount. A service fee, called a rebate, is however deducted from the remittance by the factoring company for services rendered.
It can be clearly seen that while invoice factoring sounds easy to businesses facing financial constraints, the features of the funding option require that intending borrowers do more research before putting pen to paper.