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How Invoice Factoring Works

Dec 25, 2007
When businessmen sell products to their customers, they issue invoices to those customers. The businessmen then receive payments after some days, normally 30 to 60 days, which is called the credit period. This blocks the business cash flow and creates problems if they have to pay their suppliers, employees or if they receive big orders during that time. By and large, small to medium businesses face this problem. The solution is invoice factoring. You too can avail of it.

In invoice factoring, you can "sell" your invoice to a third party called the invoice factoring company which "buys" that invoice from you. The invoice factoring company then pays you the majority portion of that invoice immediately and then takes the full payment from your customer on the due date. So, in short, your accounts receivable becomes the third party's accounts receivable. You can get your payment immediately but in 2 installments.

Usually you will get around 60 to 90 percent of your outstanding amount in the 1st installment which is payable on submitting the customers invoice. The balance installment is received when your customer pays the factoring company the full invoice amount. The factoring company will deduct a factoring fee from your 2nd installment. This fee can range from 1.5 to 12 percent, depending on a number of factors like your customers credit rating as perceived by the factoring company, the number of credit days given to your customer and the total amount involved.

You can go in for invoice factoring if your margins in sales are reasonably good and if your business is growing quite fast since this is the period where you will require access to ready funds. This is also a good way of getting funds without applying for a loan from a bank where you would need to submit more documents and have to pay interest on that loan anyway. This method eliminates credit cycles and provides you with ready cash that can be used to fulfill your business needs. Calculate your profit margins minus the factoring company's charges to arrive at a conclusion whether you can afford to go in for this type of ready finance.

You can find many invoice factoring companies that provide you ready money within 24 hours of you sending them the invoices on the Internet. Some of them even have their own collection agents to collect the payments from your customers. Check out different invoice factoring companies and compare their factoring rates before doing business with them.

This method can give you a chance to get big orders from your reputed customers who require a certain credit period but you were previously unable to execute their orders because of their credit terms. Now, since you are getting at least your purchase cost immediately, you can go in for more business with them.

Invoice factoring therefore is a good way of maintaining your cash flow and also a good way to increase your sales especially to reputed customers, without having to worry about receivables. As your sales increase, you too can go in for bulk purchases thereby getting additional discounts. It could turn out to be a win-win situation for you.
About the Author
Freight Factoring is made easy with Phoenix Capital Group. We offer Equipment Financing and full Factoring services including high advances, Low Rates, Same Day Funding and no long-term contracts. Visit our website today at http://www.phoenixcapitalgroup.com.
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