Understanding How Invoice Factoring Works

Understanding How Invoice Factoring Works

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Invoice factoring allows a business to increase their cash flow. The business does so by selling their unpaid invoices to a thirty party in exchange for a percentage of the value of the invoice. This helps businesses in terms of keeping their cash flow liquid and minimizing the time they spend waiting for incoming funds.

What to Expect from the Transactions

A business that chooses invoice factoring lets a finance manager look after their sales ledger. This may mean purchasing the money you are owed and setting about collecting the full amount of money from your customers. A factoring company will call the clients to inform them their company has outsourced their invoice collections.

Often, factoring companies pay the business about 85 percent of the unpaid invoices’ value up front. After recovering the amount of the invoices, the remaining money will be made available to you. This is minus the interest and commissions owed. With factoring, businesses will enjoy a reduced administration time to chase payments.

Invoice Discounting

Invoice discounting is an alternative to invoice factoring. Discounting allows a business to take out a loan against the value of their unpaid invoices. The business still collects the money they are owed. However, they often do not have to pay back the loan until they can get their invoice payments. When the payment is received, the business pays off the loan plus interest and fees. A number of companies choose to get invoice discounting instead of factoring since their customers don’t have to know they have a transaction with a third-party for debt collection.

Benefits of Invoice Factoring

Invoice factoring helps a business in keeping their assets liquid. More cash in the business account means the ability to invest in growth and development. While the business grows along with the number of invoices, the amount of money they will secure through factoring also grows. Usually, funds from factoring and discounting arrive quickly in their account.

The Perfect Time to Opt for Invoice Factoring

Factoring invoices can be quite useful in any business situation where the business needs additional capital they can be obtained quickly and securely. Businesses can benefit from this option if they wish to grow or expand their operation, they are low on capital or they don’t have enough administrative resources for pursuing invoice payments. A business that works with the best factoring companies can expect to get maximum benefits from factoring.

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