Invoice factoring, a subset of accounts receivable factoring is a term used to describe a form of business financing. A business sells its accounts receivables (invoices) for an immediate cash advance for cash flow. This frees up a great deal of capital for any business to work with and can be of great benefit to a struggling company. Typically a business saves money by using invoice factoring because it does not depend on clients payments. So when a business sells its invoices it gets the full face value minus the factoring fee. Since the invoices are now in the hands of another company debtors are required to pay the full amount of their invoice to the new company which retains the invoices.
Generally invoice factoring isn't considered to be part of a company's balance sheet. An invoice is considered an asset however because the total amount owed to the company counts towards overall equity. But a factored invoice is not considered a form of debt or a form of equity, which is why factored funding is simpler to attain than a traditional bank loan.
The problem with invoice factoring is collecting the full amount of the invoice. Often despite contracts and agreements a client or company will not pay the full amount of the invoice. This means that the company who benefits most is the company receiving invoice funding. When a company receives invoice funding they will receive the full amount of the invoices, but what if the invoice funding company cannot collect? In this case, debts are turned over to third party collection agencies.
The debt company is most incentivized to secure collections because it will bear the financial burden of a failure to collect. A debt collection company will use three means of collection: payment plans, settlements and occasionally legal action. The successful collection rate of these kinds of debts is much higher than small credits and debts because usually a company owes a large sum of money, as opposed to one person owing a small amount.
Invoice factoring is considered a last resort for many companies and typically the only companies using invoice funding are companies growing faster than their current assets will allow or an invoice factoring company that is struggling financially and needs capital to pull things out of the gutter.
So what is Invoice factoring?
Many people do not understand this term. Invoice factoring is a very old form of financing, perhaps the oldest. For over 4000 years people have used some for of factoring. In fact, Hammurabi the king of Mesopotamia was the first the implement this system although it was in primitive form. The Romans were the first to issue actual promissory notes at a discount. The first documented use of factoring was in the pre-revolution American colonies. London bankers would advance funds to the colonies for raw materials and then collect on arrival.
Invoice factoring as we know it today is a type of business financing that allows businesses to circumvent traditional means of funding. Methods such as bank loans and private investments are less preferred because of their restrictive stipulations and their long approval times. To get invoice funding you need invoices that can be factored. In a sense you the company are selling your debt for money now.
Depending on the financing company you could be approved in as little as 24 hours. Transfac capital for instance has some of the fastest approval rates around. Even though you may lose a small percentage your debts you will not have to worry about those clients paying you because it is no longer in your hands. Invoice factoring is a popular method of financing and it is clearly not going anywhere, the only thing that may change is the rates so get your invoice funding today.
Transportation Invoice Factoring
One of the biggest industries that utilize invoice factoring is the transportation industry. For a long time the trucking and freight industry have used invoice funding to keep their deliveries on time, and their staff well paid. Trucking companies have benefited from problem solving on invoice factoring from their financial companies. It is clear that the shipping and hauling industry require consistent cash flow in order to succeed in an ever changing marketplace. The fluctuation of drivers, various EPA standards and the ever changing fuel prices all make for an inconsistent cash flow scenario, in and industry where consistency is vital.
Invoice FactoringCheck out the day to day difference in cash flow for two owners and operators during one complete billing cycle. In this example Fred is using receivable management while Ted is not. Both drivers have just one truck and are delivering to the same customers at the same locations. For this example drivers go an average of 500 miles per day at $1.35 a mile.
Top 5 reasons you need Invoice Factoring
Invoice factoring is probably the most popular form of business financing. Companies across the United States are using invoice factoring to eliminate the need for traditional loans, and to increase efficiency. Many industries rely heavily on invoice factoring, and since it has proven itself time and time again, they should. Every industry from medical to transportation can benefit from invoice factoring. If you're not convinced read below and find out the top 5 reasons to obtain invoice factoring services.
Invoices- No new debt, no loans
- Receive payment in 24 hrs
- Eliminate collections
- No contracts
- Improve cash flow and credit
When you get invoice funding you are not creating a new debt, you are simply selling it in exchange for cash now. You are not applying for a loan and because of that it is far easier to obtain invoice factoring funds than any kind of traditional bank loan. No other form of business financing allows you to obtain quick easy funding without creating additional debt or taking out a business loan.
Average invoice funding is generally approved in 24 hours. It varies from company to company but no matter what the approval time, invoice factoring provides funding much faster than any other form of business financing. Many companies offer a 24 hour turnaround once you have been approved.
When you sell your accounts receivable to another company, you are also eliminating the need to collect on those receivables. It then becomes the responsibility of your financial company to collect on those debts. If you have close relationship with your debtors make sure you trust your financial company to treat them correctly, otherwise do not obtain invoice factoring. In the rare occasion your financial cannot collect they will generally send it forward once more to a debt collection agency.
Since invoice factoring is unlike traditional forms of business financing, there are fewer strings attached. There are usually never contracts involved, and when then are they are typically simple with few stipulations. Many companies offer no contract invoice factoring which can be very helpful in certain situations.
By obtaining this kind of financing you are going to have a lot of sudden liquid cash. This extra cash flow is a main reason businesses are attracted to invoice factoring. Supplemental cash flow allows you to pursue a variety of options from bills to payroll. It will also help your business credit rating by eliminating the creation of additional debt.
Possible Factoring Drawbacks
There are some drawbacks to invoice factoring that you should take into careful consideration. First, instant cash can become addictive to many companies. In an ever-changing market, some companies cannot handle the mounting debt they're accumulating in relation to the cash inflow so they continue to factor time and time again. This can result in a company losing some credibility by not appearing to be able to productively handle debt. Secondly, invoice factoring can confuse customers. Some customers may not understand why they have to send their payments to a completely different company and may have disputes with payments that they thought were already resolved. The dispute must now be resolved with the financing company, which could be somewhat of a hassle.
Another possible drawback is the rate of your loan. Many invoice factoring companies offer variable rates which can be confusing and cause problems from a lack of understanding. You as a consumer should be aware of your terms and how they might change in the future. Undertsanding your loan and your loans rates is the most important job for you. With a little research and careful planning you can find a quality factoring company that provides invoice factoring.