Every business needs a flow of working capital to operate smoothly and successfully, but sometimes there just aren’t enough funds available. Invoice factoring, a proven capital solution, may be just the answer.
What Is Invoice Factoring?
Invoice factoring is not a traditional loan. Rather, it is an advance on accounts receivable where a company “sells” some or all of its outstanding invoices to a third party who then pays your company most of the invoiced amount immediately and then collects the invoiced amounts directly from your customers. There are many independent factoring companies, including online factoring companies, and there are also many banks that offer invoice factoring services.
There are two types of invoice factoring:
- Recourse factoring where the factoring agent buys a company’s accounts receivable and the company pays back the factor for any invoices that are uncollectable.
- Non-recourse factoring where the factoring agent assumes the risk for all uncollectable invoices.
Invoice factoring offers the advantages of predictable and improved cash flow. It typically comes with lower interest rates compared to a bank loan and is usually easier to obtain. It can reduce some business overheads such as paying a dedicated credit control staff.
How Can Invoice Factoring Funds Be Used?
Funds can be used for many purposes including taking advantage of seasonal or unanticipated business opportunities, repaying a conventional loan, bridging short-term operating expenses, keeping up with business growth, and building a company’s credit.
How Does Invoice Factoring Work?
It is rather simple:
- Your company must have larger creditworthy customers for goods or services.
- You submit correct invoices to your customers.
- Your company “sells” its unpaid invoices to a factoring company.
- The factoring company verifies that the invoices are correct and pays the company 80-90 percent of the invoiced amount.
- Your customers pay the factoring company directly.
- The factoring company pays your company the remaining invoiced amount minus their fee.
Seek Expert Funding Assistance
Contact Magis Funding to help achieve your business goals. Experienced professionals with great solutions tailored to your financial needs.