An Introduction To Invoice Factoring

Posted by Team Finaxar on Mar 25, 2019 8:09:29 PM


invoice factoring

Invoice factoring can help you grow your business faster with steady cash flow.

What is factoring?

How does Invoice factoring help your business grow?

How does an Invoice Factoring company handle the collection?

How can you get your funds immediately using factoring?

Is Invoice factoring secure/reliable?

Invoice factoring is a method which essentially lets companies sell their invoices to receive immediate funds from a third party. Are you someone looking to grow your business? Is working capital stopping you from expanding your company? In this blog post, you can find more about the basic concept of Invoice factoring, its workflow and how it can help you grow your firm.

What Is Factoring?

Factoring is a financial service where you sell your accounts receivables to a third party called “factor”. Invoice factoring takes your invoices as an asset for this upfront payment and avails you a certain amount that compliments the invoice you have submitted.

invoice factoring

Unlike banks, the factor does not charge a processing and application fee for this service. Instead, they charge a small fee for their financial services. Finaxar is a financing institute which credits you with an advance of 80% of the outstanding invoices and pays the remaining 20% with a small fee once the invoices are cleared. You can read how the process works at Finaxar here. This process can especially help small businesses to meet their needs for capital without waiting for their receivables to be paid.

For example, let’s say you started a small venture.

  • The shipment process has already begun with your regular customer.
  • You have reached an agreement where your customer is promised to pay the company in 90 days’ time after the shipment of the product.
  • In the meantime, your company receives larger orders and falls a shortage of capital to scale up the production.
  • You reach out to the factor, fill the application and sell them your unpaid invoices.
  • If you pass the eligibility criteria, the factor can make an 80% upfront payment based on your invoices made to your customer.
  • Your customer will be paying their debts directly to the factor and you can continue to provide more quality service without interruption/delay.
  • The factor pays the rest of the 20 % deducing a nominal fee once your customer pays the invoices to the factor.

How Does Invoice Factoring Help Your Business Grow?

Factoring brings you a steady and maintained cash flow to keep up with the market. An invoice factoring can help meet your goals eliminating the downtime. At the same time, it is a time saver because you don’t have to be involved in the follow-up process of the payment. You can check here to get an idea of the hassle-free application process at Finaxar.

The follow-up process involves keeping track of all the paperwork related to payment details and administrative work. Having a factor managing this, you can benefit from a significant amount of time to accommodate larger projects without the constraints of working capital.

You are effectively out of collecting end of payment from the customer.

How Does An Invoice Factoring Company Handle The Collection?

Invoice factoring can sound confusing in terms of its workflow. What if the customer refuses to pay the invoiced amount? Will it become the liability of the company that benefits the factoring service? This is where you need to understand the terms of “recourse” and “non-recourse” in factoring.

Recourse calls for the company to buy back their receivables in cases where the customer doesn’t pay the invoices. It is agreed to the factor that in such situations, the company will compensate for the factor for the invoices that are not paid by the customer.

Whereas in a non-recourse method, it is the factor that faces the risk and not the owner of the business/ company. This due amount will be considered as the “debt” to the factor and you’re not in the loop.

How Can You Get Your Funds Immediately Using Factoring?

The invoices collected from the company act as collateral or an asset to the factor even though it functions differently. As soon as the company submits genuine invoices and gets verified by the factor, the company receives an advance up to 80% of the invoiced amount.

The remaining 20% is paid by the factor once the invoices are settled with the customer with a deduction of a small fee.

invoice factoring

Is Invoice Factoring Secure/Reliable?

To make smooth functioning of business from both ends (company and factor) it is necessary to have some ground rules. When it comes to invoice factoring there are documents that need to be verified by the factor prior to approving your request, which is a lot easier than a bank loan application.

The eligible companies’ credibility will be evaluated by cash flow experts and will benefit from receiving the funds at a faster pace. Through this process, the factor and the company will have an idea about the customers they are dealing with and make necessary contracts.

So, how secure is invoice factoring for your business? It depends mainly on the terms and conditions put forth by the factor you are approaching. Therefore, it is necessary to choose the company wisely before making a decision on invoice factoring.

In conclusion,

Invoice factoring is a great facility that allows you to fund your business in a smart way. It benefits you to grow your business removing the financial obstacles. This also saves your time by getting administrative works out of your way regarding accounts receivables. With the help of a reliable invoice factoring company, you can take actions to bring your business to the next level.