Invoice Factoring Explained

For every business, whether big or small, there are times when incoming revenue does not match immediate needs or outgoings. Sometimes there is plenty of incoming money expected to come in from invoices, but none readily at hand. This can hinder the day-to-day operations of a business or even hold back much-needed growth. Business is not always as simple as ‘money in, money out’.
Have you thought about Invoice Factoring?paid
Businesses, for a multitude of reasons, on occasion need readily available money. Invoice factoring can offer a great way to unlock money owed to the business without waiting for clients to honour invoices, which can sometimes take weeks or even months.

So if you’re new to factoring and looking into a factoring solution, look at just how invoice factoring works and the advantages it can represent for businesses.

What is Invoice Factoring?

Invoice factoring can help businesses secure money from their expected, invoiced income.

A business might need this money for a variety of reasons – perhaps because a client owing a large amount has not paid and put the daily running of the business in jeopardy; the business has a lot of income on paper but none actually coming in for weeks to months, leaving them short of the money they need to move ahead and grow. In short – businesses always need money and for wildly different reasons.

 

Invoice factoring allows the business, via a third party invoice factoring lender, to unlock money they already have on paper. In this way, it differs from traditional forms of lending where the business has to secure a loan with commodities or collateral.

  • Invoice factoring helps businesses that have money on paper – from issued invoices, use the money before fulfilment of the invoice by their client. 
  • The purpose of invoice factoring is to allow businesses to free up money for the short or long-term future of their business. 
  • It differs from traditional loans, in that the business actually has the money they are using, just not readily at their fingertips.

How Does It Work?

Invoice factoring, at the base level, is a relatively simple process. Moreover, It can provide injections of money into the business much quicker and with significantly less risk to the business than a bank or investor loan.

The process usually takes 24 hours or less and removes the stress of chasing invoices and money shortages from the business’s shoulders.

  • Firstly, the business agrees to supply a service or product to a client. The business and client agree upon and draw up an invoice. This determines, in a legally binding form, the payment for the service or product rendered. 
  • Once the job finishes, the business sends the invoice to client. Payment schedules differ, with some taking a few days and others taking a few months. Some clients might even attempt to dodge honouring the invoice. 
  • The business passes on their outstanding invoices to an invoice factoring lender. The lender agrees to recover the invoice fees for the business. The lender then provides the business with a percentage of the expected invoice income – sometimes up to 85 percent, but usually it is much less. This money usually arrives with the business in 24 hours or less. 
  • The invoice lender then chases up the invoice payments, which may take 30-60 days. With the settling of all invoices, the invoice factoring lender transfers the remaining balance to the business, minus any fees for handling and lending. 

A few variable factors may change how much the invoice factoring lender charges to provide their services. These might include the credit worthiness of the business’s clients; the amount of money due to the business from their outstanding invoices and whether the business and lender have an established relationship.

Advantages of Invoice Factoring

Most small and medium-sized businesses simply do not have time outside of cursory phone calls to chase up invoices.

This puts them in an awkward position, because they have to try and recoup money owed, facing the choice of neglecting cultivating new business or writing off the money that is rightfully theirs. Invoice factoring alleviates this stress from the business, allowing them to focus on what they are best at instead.

  • To secure money from an invoice factoring lending, the business does not risk any collateral or the firm itself. The money comes from money that is already, technically, funds that belong to the business. 
  • Because invoice factoring is different from a bank-style loan, there are no credit checks on the business or the owners. 
  • The turnaround of lending is usually less than 24 hours, whereas bank loans can sometimes take a month or more. This means more money at hand to invest in the business, pay wages, and generally grow into a stronger concern. 
  • Invoice factoring is a form of lending that comes from the cash flow of the business, unlike a loan from a bank or outside investor where the business might find itself unable to meet repayments. 
  • Invoice Factoring firms range across many different sectors, meaning that most businesses can find a solution that is right for them. 
  • Invoice factoring also offers protection from bad debt, insulating the bottom line of the business from clients who do not pay. 

It is a fact that there is no single financing solution for every business. Every concern has their complex needs and wants. Traditional bank business loans, with high interest rates and sometimes rigid structures do no always fit the fluid world of most businesses.

Rather than overwhelming the business with debt that it can never hope to repay, invoice factoring offers a flexible lending option that comes from the business’s own income.

What do you think?