Invoice factoring is a form of financing where a business will essentially “sell” an invoice to a financing company for a slightly discounted rate, usually between 75 and 90 percent of the overall value of the account. The financing company than assumes full responsibility for the collection of the accounts payable, while the selling company receives a cash payment for the sale of the account. For many businesses, this is an ideal short-term solution to several issues.
Account Collection.In the event of a delinquent or soon to be delinquent account, most businesses are not equipped to handle account collection through in-house channels. This necessitates the use of agencies and services designed to assist in the collection process. In the case of small businesses or start-up businesses, the loss of liquidity and time costs associated with the use of these services can be devastating. Invoice factoring allows troublesome accounts to be handled quickly and efficiently.
Growth Support.Many new businesses are constrained, at least during the early stages of development, by the availability of capital to fund new projects. Invoice factoring ensures that growth and development is limited only by the overall volume and relative size of the projects being completed. Essentially, invoice factoring allows new business to grow at a rate directly proportional to production levels.
Time Sensitivity.Financial investments are often defined significantly by the time sensitive nature of the specific investment. Invoice factoring allows business to take advantage of sudden and potentially profitable investment opportunities as they present themselves, regardless of current levels of liquidity.
Financial Records.Unlike alternative forms of financing, invoice financing does not take into account the credit history or current financial status of the borrowing institution or business. When determining the terms and conditions of a specific account the finance company evaluates the value of the invoice account itself. This allows companies that may not have an extensive credit history, or even some amount of negative factors on their credit account, to obtain lines of credit. Additionally, the accounts can be evaluated much more quickly than a company wide evaluation can be conducted, speeding-up the overall process.