Invoice Factoring

What Is Invoice Factoring?

Invoice factoring (also known as invoice financing, accounts receivable financing, and accounts receivable factoring) is a financial tool used by businesses as a source of operating capital or working capital.

Taken literally, invoice factoring is the selling of a business's invoices (accounts receivables) to a third party at a discount.

When a company provides a good or service, an invoice is generated and sent to the company that is the recipient of the good or service that states that money is owed to the first company by a certain date (for example, within 15 to 30 days).

By selling this invoice to an invoice factoring company, the company providing the good or service can now receive most of its money in a couple of days instead of possibly having to wait the full 15 to 30 days (using the above example) to receive the payment while still allowing the paying company the 15 to 30 days to pay (this company would just have to send the payment to the invoice factoring office instead).

Why A Company Would Want To Sell Its Invoices

Selling accounts receivable to a third party allows businesses to get the money that is already owed to them sooner rather than later.

Selling their invoices basically allows these businesses to unlock and liquidate the money that is being tied up in the receivables.

One main benefit of invoice factoring is that it offers a struggling business a way to stay afloat.

Businesses can use their freed-up cash to stay caught up with payroll, to keep current with payments owed to their own vendors, and to keep up with paying other monthly expenses.

Without invoice financing, these businesses might have to wait for their customers to pay their invoices before being able to have the funds required to meet their monthly expenses. 

By the time the customers pay their invoices, payroll dates and other due dates for expenses may have already passed.

Another main benefit of invoice factoring is that it offers a way for a company to grow.

Freeing up money that would otherwise have been tied up in accounts receivable, a company can use that money to fund the raw materials or supplies required for future orders.

Without an invoice factoring service in place, future orders or even potential new clients or customers might have had to have been turned away.

What Is A Factoring Company?

The third party factoring company mentioned above to which a business would sell its invoices is called a factor. 

In providing accounts receivable factoring services to businesses, a factor would normally set up an agreement with these businesses to purchase their invoices on a regular basis (monthly, for example).

The factor basically would function as a funding source that provides businesses the operating and working capital they need to either stay in business or to grow their business.

The factoring company (factor) in turn earns its money through invoice discounting.

The factor earns a profit from its accounts receivable factoring services by purchasing an invoice for some amount that is less than the amount owed on the invoice.

Once the invoice is paid in full (paid to the factor since the factor bought the invoice), the factor keeps the difference between the total invoice amount and the discounted amount paid for the invoice as its profit.

Businesses That Would Benefit From Invoice Factoring

The following are some of the types businesses that would benefit from invoice factoring services.

1)  Service-based businesses such as janitorial businesses and security guard businesses.
2)  Manufacturing businesses.
3)  Trucking businesses.
4)  Medical supply businesses.
5)  Businesses that do work for government clients.

Related Articles:

Obtaining Invoice Factoring Services

Learn what is involved with obtaining invoice factoring services.

Qualification Evaluation

Learn what it takes to be qualified for setting up a factoring account.

Documentation Requirements

Learn what documents will likely be required for setting up a factoring account.



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Invoice Factoring