Are you aware of what invoice factoring is? Well, if you are not aware, or need a refresher course, we will be discussing it here.
Invoice factoring is an excellent financial tool. It helps to provide short-term capital to a business in exchange for assigning or selling invoices to a factor.
The factor gives you about 80% of your invoice value. When the invoice gets paid, then the factor pays back the 20% of remaining fees. Let us understand how invoice factoring works.
Understanding the Working of Invoice Factoring
If you want to qualify for factoring, then the first thing that you need to remember is that your invoices should be payable within a time-frame of about 90 days. Once you meet this basic criterion, then you can look for a factor that you wish to work with in the long-run.
You will have to undergo the application process, and you will have to sell all of your outstanding invoices to the factor. When you decide to sell your invoices to the factor, then they will first check if you meet the eligibility criteria.
The factor will also help your customers figure out if they are great credit risks. Based on the research, if the factor decides to grant you the funds, then you will have to sign a financial agreement with the factor.
The agreement will define the initial dollar amount that you can borrow with ease. Next, you will receive an initial amount from the factor, which is known as the advance rate. The advance amount depends upon your transaction size.
Once you sign an agreement with the factor, they will also issue a notice of assignment to those customers that you decided to factor. The notice of assignment notifies that the factor will receive future payments on behalf of your business.
All the payments made by the customer will end up in the lockbox account, and the factor sets this account. The clients of the business will have to pay the factor in 90 days.
Usually, the factor adheres to the collection techniques that are set up by a business, this is so your customers will not have to suffer any negative business impact. Once the factor receives the payment from your clients, they will return the remaining balance to the business after deducting their fee.
Well, this amount is the reserve amount. If you need consistent cash flow, then invoice factoring will be the right move. The best part is that you receive the funds within just about one to three business days.
However, one thing you should keep in mind is that you will only be eligible for factoring if you do not have any previous legal or tax issues. The good news is that there are many reliable factoring companies available. You can visit the websites of the top factoring companies and enter your factoring information here. By following this approach, you will be able to get access to a reliable source of funds in no time.