Learning About Invoice Factoring
Invoice factoring is a lending service that helps businesses to receive money for their current invoices before their debtors pay them.
How Does It Work?
Factoring increases the work capital allowing the company to manage it more flexibly. Of course, this type of service comes with a price.
Factors will visit the company and verify the company’s records to see if it is eligible for a factoring facility. If the factors consider that the company can be approved for invoice factoring, an agreement is signed. In this agreement the factor will agree to pay up to 85 percent of the invoice value. The percent is calculated after reviewing the company’s data. The payment to the company is usually sent in 24 hours.
The company raises an invoice and sends it to the customer with the instructions to pay the invoice directly to the factor. Furthermore, a copy of the invoice will be sent to the factor. Then, the factor will put at the company’s disposal the amount of money specified in the agreement. The factor will make all the necessary arrangements for the customer of the company to pay the bills.
Advantages and Disadvantages
One of the biggest advantages is that a company will have access to the money faster than the customer may have paid. Considering that there are a large number of factors, the competition is high so prices should be low. Moreover, by working with a factor, a company might have a better understanding of its partners especially if they have credit problems. A company will also be protected against bad customer payments if it has a non-recourse factoring.
Of course, there are some disadvantages in dealing with factors. One of them is that some of your customers may refuse to work through a factor and prefer working directly with the company. The invoice factoring costs money and it signifies a decrease of the company’s profits.