Factoring accounts receivable is also called invoice factoring, accounts receivable financing, or factoring (in a short way). It’s a financial transaction where the company sells its invoices to a factoring company. It’s totally not like business lines of credit, as factoring is not a loan. Instead, it is a quick cash payment when the company needs it in emergency circumstances.
Whether it’s a cash solution or not? To come to a conclusion, let’s understand a few elements of factoring.
How Does Invoice Factoring work?
What is invoice factoring? As mentioned, it’s a financial transaction where an organization offers its unpaid invoices to the factoring company. Let’s understand how it works. Suppliers or manufacturing companies work with many purchasing & selling of raw & finished goods in bulk. Situations occur when customers make delays in payments, and you need the cash urgently. Here, invoice factoring supports you. You sell the unpaid invoice(s) to the factors and receive the cash.
However, the factors will charge some percent of fees in consideration of fast cash. In addition, the fee depends on the amount of invoice and company policies. Factoring has helped companies to free up capital that is tied up due to customers delaying payments. Moreover, transfer the default risk into the factoring company in case customers won’t make the payment.
How is Factoring Accounts Receivable Priced by Factors?
The factoring fee is a percentage of the invoice amount that the company needs. However, the rate is based on few general factors such as:
- Nature of the industry that the company is in.
- The creditworthiness of the company.
- Outstanding days of invoice.
The factoring rate also depends on two main aspects – recourse or non-recourse factoring. Generally, factors charge lower rates in recourse factoring and vice versa. In recourse factoring, factors don’t bear the risk of uncollected invoices, whereas, in non-recourse, factors bear the risk of bad debts.
Quick Cash Solution or Not?
Businesses run in a dynamic environment. No business can sustain itself without taking risks & challenges. Many internal & external factors affecting the organization. Change of government policies, employee turnover, competitors’ successful strategies, and much more impact your business.
Earlier, businesses were dissolved due to a lack of funds. Thus, a temporary fall in the business comes & goes. However, no owner wants to stop the business forever due to a temporary shortage of funds. Therefore, to meet the short-term requirements, the government has introduced various commercial loans ( secured & unsecured). Undoubtedly, these financial support services have worked miracles for many small to medium-sized businesses.
A quick cash solution in need is always worth it. It’s hard to imagine that you need to swap the business location because of not paying your rent due to short-term financial deficiency. Of course, shifting your business from one place to another is not easy at all. There are many things that you have to consider. However, the fast cash service is a great help to many companies.
Invoice factoring is surely a fast cash solution that works as a backbone when you need it the most. No doubt, you need to pay the extra fees, but the service heals your worst situation. Giving some amount of fee and getting a bigger payment in return is definitely a fast cash solution.
Takeaway
We hope by reading the guide, you have a better idea of invoice factoring. Now, it’s feasible to make a better decision in case you need an easy yet fast cash solution. Factoring is highly implemented in various parts of the world. However, be certain to choose the authentic factoring company.
