Invoice Factor in Simple Terms
If you are new to factoring finance, the terms of an invoice factor contract may seem ambiguous to you. But in reality, the concept of invoice factoring is fairly simple. It is the process of selling commercial account customer invoices or account receivables at a discounted rate in exchange for liquidity. To put it simply, factoring is a financial tool that can be used to procure payments on your invoices as soon as they have been issued, without waiting for the customer to make the payment.
This process is a wonderful way for small and mid-sized businesses to turn their slow paying invoices into instant cash. Essentially, invoice factor offers small businesses the provisions to capitalize on their future gains today. It is a very effective way of covering the gap in cash flow that often results from offering credit to customers.
Invoice factor and invoice discounting are congruent terms, with one slight difference. In factoring, the company assumes complete responsibility for maintaining the sales ledger and the collection service. However, when it comes to invoice discounting, you continue to run the sales ledger and are responsible for collections. The primary advantage of discounting is that you can continue building strong relationships with your customers, yet you can also rest assured that you will receive your money on time.
How can the Invoice Factor process help your company?
It’s really quite simple: Most businesses run on credit terms, so even after delivering the product or service in question, you may have to wait for 60 to 90 days in order to receive payment from the purchaser. This can, however, put undue pressure on your company’s cash flow. One option is to apply for a bank loan or over draft to assist you in trading – but keep in mind that this path inevitably leads to added liabilities. In contrast, when you choose to invoice factor, you can count on receiving the cash you need when you need it – and since it’s a cash advance rather than a loan, there are no liabilities involved.
Furthermore, factoring automatically provides protection against bad debts, ensuring that you’ll receive up to 90% of the invoice value regardless of whether the customer pays the factoring firm or not.
