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Invoice Factoring: How Does It Work?

Businessman managing his financesInvoice factoring is a financing option that can be availed by businesses that invoice other businesses or government agencies. Through advances in information systems and Internet technologies, you can now apply for invoice factoring online. By electronically assisting clients in the invoice creation process and collection of accounts receivables, your business can easily take advantage of this financing option.

What it is

Invoice factoring involves the selling, at a discount, of accounts receivables of a business to a third party buyer (i.e., a factor). The invoice has to first qualify for factoring before an application process is undergone (e.g., invoices must be due and payable within 90 days). Once the business is found to be eligible for financing, the factor purchases the invoices.

Typically, the factoring company would pay 80% to 85% of the value of the invoice. The remaining value, after all the factoring charges are deducted, is only paid after the factor receives payments from the business. Factoring fees are often priced from a low of 2% to a high of 10%. The difference takes into account the credit profile of the customers.

Invoice factoring is fast becoming a popular financing option as all business types have taken their chances to work with a growing number of factoring companies, especially in the U.S.

Why you need it

Invoice factoring gives businesses a working capital in exchange for selling their invoices to a factor. So, it is perfect for those looking for a quick answer for their short-term cash flow issues. Also, it is usually a solution for businesses in simplifying their cash flow conversion. Since it is a short-term reprieve for normally low-capital concerns, invoice factoring is not for financing hefty capital investments.

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Invoice factoring sounds harder to accomplish than taking a loan from the bank, but the fact that you can use your unpaid client’s invoices to get immediate capital is an opportunity in itself. You only need to be sure that your client will pay on time. The good part is it is cheaper than most short-term loans.

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