Factoring businesses, also known as invoice factoring, is a type of invoice financing in which you “sell” part or all of your business’s outstanding bills to a third party in order to improve your cash flow and overall revenue stream. A factoring firm will often pay you the majority of the outstanding bill and then collect the remaining payment from your clients over a period of time. You will receive a lump sum payment from the factoring company, and your original invoice will be converted to an agreed-upon credit agreement. This type of financing is often used for working capital management needs.
While some businesses may view invoice factoring as providing them with credit control without having to build up any additional credit, this is generally not the case. Factoring arrangements are considered a cash-out transaction and therefore must meet certain credit control guidelines. Businesses will typically need to demonstrate to their factoring broker that they have an established history of paying their bills on time. Credit agreements between factoring firms and business clients usually do not exceed seven years’ term. While some credit agreements can be renewed after this period, the renewal process will generally be determined by the current financial and credit situation of the business client.
One of the primary benefits of using invoice factoring as a solution to cash flow issues is that it provides businesses with immediate credit – they instantly become eligible for cash advance and receivable financing. Another benefit is the ability to quickly obtain funds when needed. The process works by arranging a temporary contract between the factoring company and your business. This ensures that your business receives its bill payments on time and is able to effectively use credit to finance operating expenses and capital expenditures.
Invoice factoring allows businesses to reduce their reliance on traditional banking relationships. Typically, a business client has a substantial amount of fixed assets that are collateral for loans, such as equipment or inventory. A factoring business client can obtain a line of credit at relatively low interest rates from a factoring company, which can be used to fund inventory purchases, purchase new equipment or pay for marketing or operating costs. The factoring companies typically make advances based on your business’s current sales and debtors. Therefore, they provide the cash you need when you need it.
In addition to cash advances, many factoring companies offer non-recourse factoring. These services are available in several different forms, including commercial lines of credit, commercial trucks, and non-recourse unsecured loans. Non-recourse factoring companies do not require a collateral commitment, so debtors can access this type of financing as needed, and businesses have a choice as to the method by which they repay the loans.
Businesses commonly use invoice discounting to free up additional resources for growth or to reduce their current level of debt. There are many invoices outstanding from clients who have not been paid and businesses can quickly become overwhelmed with paying bills that are constantly coming due. Businesses can even choose to “rent” invoices that have only received a single payment, but which are still due. Businesses can receive full payment for these invoices when they become factored.