Know the basic about Invoice Factoring

What is Invoice Factoring?

Also referred to as account receivable financing, invoice factoring is an alternative to bank loans. If you are a businessman, you would be well aware of the fact that sales invoices get paid at a very slow rate, often taking two to three months time to get converted into cash. This hampers the cash flow into your business and make it hard to meet the regular operational expenses. In such a situation, you can use invoice factoring to convert your unpaid invoices into cash.

This alternate financing method basically involves the selling of your account receivable bills and invoices to a third party (often referred to as a lender, debt factoring company or the factor). In exchange, they collect the payment of the invoices and provide advance cash.  

This method could be used by any business regardless of its size and industry type. However, mostly small companies opt for it due to lack of financial assistance and higher administrative cost.

The benefits of invoice factoring

·         improves your cash flow

·         provides quick help to fulfil regular operational expenses

·         increases working capital- this proves beneficial for the start ups or small firms

·         fuels business expansion

·         gives monetary assistance for acquisitions

·         no need for approval from traditional banking system

·         better sales ledger management

·         offers complete control of the business (unlike venture capital)

·         do not demand property collateral (unlike regular banks)

·         instils trust in the associates about the company's financial health and ability to pay

·         avoids insolvency or liquidation of the assets

More things one should know about invoice factoring

·         the interest on the loan amount taken through invoice factoring could be higher than what is charged by the bank because the factoring company is providing more leverage and working capital with higher risks than a bank can accept;

·         invoice factoring takes half of the time taken by the banks to  approve the loan so service is better than most of the banks;

·         the lender might affect some of your selling decisions but not allowing you to lend to customers with poor credit ratings;

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Created on Dec 31st 1969 18:00. Viewed 0 times.

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