What is Invoice Factoring

What is Invoice Factoring

Invoice factoring is a financial tool that businesses can use in order to enhance their cash flow. An invoice, or typically known as accounts receivable, is technically an asset. For the most part, these invoices are paid 30 to 90 days after the service or product has been sold. If a business does not want to wait the full period in order to be paid on their invoices, they can factor their invoices and receive cash within days.

Invoice factoring is done by a factoring company. They will give you a certain percentage of the value of your invoices, and when your customer pays their invoices, that is when the factoring company will receive their money. So for an example, if you have an accounts receivable that is valued at $100,000, a factoring company might extend you $90,000 now, and charge a 2% factoring fee. When your customer pays in 60 days, you'll pay them the $90,000 plus the 2% factoring fee.

This financial tool can be extremely useful in times when your business needs fast access to cash, but is unable to secure a line of credit from banks for various reasons. When you're looking to do invoice factoring for your company, the factoring companies do not look at the credit of your own business, but they will look at the credits of your customers.

A lot of businesses out there have no idea that they could be improving their businesses cash flow and put it in a position for upward growth. Some businesses can have an extreme amount of money tied up in accounts receivable, and all they have to do to unlock their cash is to factor their invoices.

The great thing about invoice factoring is that you do not have to be a large corporation in order to factor your invoices. There are even some businesses out there that will factor single invoices. It is also not a long-term contract that you get yourself into. If all you want to do is factor some invoices one time, and then continue on with your business as you have in the past, and that is perfectly fine. Also, on the flipside, if you want to factor your invoices on a continuous basis, then there are a number of factoring companies out there that can handle your request.