Factoring Articles

Invoice Factoring Transactions

Rapidly becoming a common way for business financing, invoice factoring is especially effective now that business loans are difficult for small to medium-sized enterprises (SME’s) to obtain. It is a good business financing tool, and it works very well for companies that have cash flow problems, and for  growing companies.

A specialised form of financing, factoring has been designed to help companies who sell to their clients on net 30 to net 60, and even 90 day terms, but can't afford to wait to get paid for work done, or products distributed. Businesses find themselves with this challenge due to a number of reasons including: 1) poor capitalisation or 2) fast growth.

The truth is, fast growth is usually the main reason companies chose to do business with an invoice factoring company. For example, an SME gets a very large order from a client, and they can deliver it but can't afford to wait 30 days to get paid because they have their own expenses to cover. One option is to turn the sale away. The better option is to factor it!

So how does invoice factoring help a company that can't wait 30 to 60 days to get paid? Simple - it provides a cash advance against those invoices. The advance enables the client to cover business expenses without worrying about the timing of client payments. The transaction is settled once the end customer pays the invoice in full.

Typical invoice factoring transactions are structured as an invoice purchase rather than a business loan. The factoring company purchases the invoice from the client and pays for it in two instalments, the first of which is known as an advance – which is anywhere from 70 to 90 percent of the invoice value. The remaining 10 to 30 percent of the invoice won’t be advanced but is used as a reserve to cover factoring fees and invoice discrepancies. The second instalment is known as the rebate, and this is provided once the invoice is paid in full. The amount rebated is usually the reserve, less any payment discrepancies or fees.

An advantage of invoice factoring is that is available to businesses that have no credit history or hard assets, like property. This makes it an ideal funding solution for small and medium sized companies that can't afford to wait up to 45 days to get paid by their clients.

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