With recourse factoring, you take on the risk. Their difference lies on who takes on the risk. When it comes to invoice factoring, you have two options. All in all, you get $93,000 from your $100,000 invoice. If your customer takes 4 weeks to pay the invoice, the factoring company deducts the 3% processing fee ($3,000) and the 4% factoring fee ($4,000) from the reserve and sends you the remaining $8,000 as rebate. This is what will happen: You immediately get 85% of the invoice value as advance ($85,000) and the factoring company holds the remaining $15,000 as reserve. Your contract specifies that the advance rate is 85%, the factor fee is 1% per week, and there is a 3% processing fee. You approach an invoice factoring company and apply for financing with your invoice as collateral. Let’s say that you have an outstanding invoice worth $100,000, due in 4 weeks. Let’s look at a specific example to make things clearer. Those fees are essentially the price you pay to have cash on hand now instead of weeks later. Some factoring companies also charge a processing fee, typically around 3%. To illustrate simply, a 1% weekly factoring fee on a $100,000 invoice means that the factor will charge $1,000 every week the invoice remains unpaid. The factoring fee is a percentage of the invoice value and is usually calculated on a weekly or monthly basis.

The customer enjoys better payment terms.

The transaction benefits all the parties involved:

Once the customer pays the invoice, the factor takes out its fee (called the factoring fee or discount fee) from the reserve then forwards the rest (called the rebate) to the client. The factor gives the cash advance to the client, holds the remaining amount as reserve, and takes over payment collection from the customer. The ownership of the invoice transfers to the factor, which gives the factoring company the legal right to collect the debt from the customer.

The client then sells the invoice to a factoring company in exchange for an immediate cash advance amounting to a percentage of the invoice value (typically 70%-90%). The invoice is a financial asset that gives its owner the legal right to collect money from the customer. The customer has a financial obligation to pay the client, who owns the invoice.

The factor - the company that provides funding to businesses in exchange for outstanding invoicesĪfter providing goods and services, a company (the client) sends their customer an invoice.

The customer (also called account debtor) - the company that owes the client money for the goods and services received.

The client - the company that issues the invoices.

How does invoice factoring work?Ī factoring transaction involves three parties: We will discuss the difference later on in this guide. Take note, however, that even though many companies use the terms invoice factoring and invoice financing interchangeably, the two are technically different. Invoice factoring is a kind of financing where you can get cash advance for your unpaid invoices. It can also be called a lot of other terms, such as accounts receivable factoring, receivables factoring, AR factoring, invoice financing, accounts receivable financing, receivables financing, AR financing or just plain factoring. Still not sure if invoice factoring is right for you? Read on to learn more about this creative debt What is Invoice Factoring?

One of the popular business funding options is invoice factoring, which gives you access to your capital without having to sell equity or take on debt. Naturally, business owners look for ways to improve their cash flow. This can be a stressful situation for business owners, especially if the financial health of the company is at stake or when the company is having a hard time meeting its own financial obligations or maintaining its good credit score.

It is hardly surprising, then, that many small businesses experience cash flow issues when their capital gets stuck in unpaid invoices and cannot be funneled back into the business immediately. In fact, in some industries, long payment terms have become the norm. If you’re frustrated by late payments, you’ve probably been less than thrilled at the recent popularity of extending payment terms. Invoice Factoring – The Solution to Many Problems

Best invoice factoring companies