One of the quickest ways to access commercial financing – invoice factoring companies use invoices as the basis for funding. The factoring company leverages customer accounts and provides funds immediately from creditworthy account debtors. The best way to illustrate this form of transaction is through an example;
1. Assume a client sells products/services to various customers. As soon as they provide their services, they issue invoices.
2. After we have checked the account debtors (customers) creditworthiness, the customer is notified to remit payments directly to us, the factoring company.
3. The factor wires funds to the client making an advance which is the percentage of the total amount. The advance is usually 80% – 85% of the face value of the invoice, depending on certain variables. The remaining percentage is called the reserve, which is held until payment is received.
4. The factoring company waits to get paid directly by the client’s customers. Once paid, a service charge is deducted from the reserve and the balance is sent on to the client. Each time an invoice has been paid the transaction is retired.
The invoice factoring process can be repeated for every invoice issued, providing a flexible line of financing that grows with the business without having to reapply for increased volumes.
How can I determine if invoice factoring will help my clients?
Depending on the business model, factoring accounts will help your clients in need of capital if the business has reasonable profit margins or is growing too quickly. Mid size companies with 20% or more profit margins can usually do well with accounts receivable factoring. An additional advantage of invoice factoring is that it does not require owners to give up equity – enabling them to grow their company without diluting ownership or showing any long term liability on the balance sheet.
If you are not sure if factoring accounts is a good fit, please contact us right away for additional information.