Invoice factoring is a kind of invoice finance where one sells some or the entire outstanding invoices of the company to a third party. This helps to improve the cash flow of the company and also stabilize revenue. Invoice factoring is also referred to as debt factoring or accounts receivable factoring. Because of the benefits rendered, companies make use of invoice factoring.
How does invoice factoring function?
- Invoice factoring works according to the following as mentioned below:
- A factoring company is chosen that has the experience and the potential to meet the demands
- Once a factoring company is chosen and the contract is finalized, the business/company chooses the clients for factoring
- The business sends the invoices to the factoring company. After the invoices are received, a percentage of the invoices is given to the business/company
- The factoring company sends the invoices to the customers for conducting the processing of payments
- Finally, the customers pay the invoice in compliance with the factoring company. When the final payment is made, a percentage of the invoice is given back to the business/company subtracting the fees.
When should a company utilize factoring?
When a company/business usually has a lot of outstanding invoices, and the cash flow is also hampered, the company/business must utilize invoice factoring. A company normally sells on 30-day payment terms. The majority of the debtors pay within a 30-day period, where some are required to chase, while some go beyond the limit and need more effort on the company’s part.
The 30-day bulk of revenue presents the chunk of the company’s potential cash flow which cannot be used by the company. Thanks to invoice factoring that enables the company/business to let go of the cash or a part of it almost instantly. The cash can be used for the following:
- Replaying a loan
- Reduce short-term expenditure
- Seeking advantages of business opportunities
- Any other reason that tightens the cash flow
Advantages of invoice factoring
- Enhanced and predictable cash flow
When invoice factoring is in use, a bulk of a company’s invoices get instantly paid. There is no need to wait for the capital to come in after chasing on behalf of the company/business. This helps the business plan and prediction accuracy. Furthermore, it also allows for the company to seek every opportunity that comes.
- Cheaper and better than a bank loan
Invoice factoring is excellent for short-term funding demands as they are easier to obtain and cheaper as well than bank loans. The challenges of debt management also get eliminated from the shoulders of the company. Based on the customer base of the company, it could be an excellent way to save.
- Better scope of business survival
When the company/business enjoys better cash flow, its survival rate becomes higher. Several businesses fail because of poor cash flow. Thanks to invoice factoring that can help businesses to survive wisely.
Every company or business that wishes to maintain a stable cash flow and a better chance of survival must consider invoice factoring. The concept has time and again proved to be beneficial for several dying businesses to revive and keep functioning.