Invoice Factoring : The Basics Explained
In simple terms, invoice factoring is the process of selling a company’s invoices to another company for a defined amount. The company that purchases those invoices is then able to collect the payments as they see fit. While invoice factoring sounds like a great idea on the face of it, there are benefits and constraints that make the decision to sell your invoices a little more complicated. Detailed below are the pros and cons of invoice factoring.
Invoice factoring is much more complicated than how it is explained above and it involves setting up a contract between a company that wishes to sell its accounts receivable, and a factoring company. The minimum contract length is usually one year, and there are certain terms that you must adhere to in order to meet your end of the contract. These terms could be fees, monthly minimums and possibly others.
Some common terms which you will be required to meet when using a factoring company are minimum invoice values and fees. The minimum invoice value that you will agree upon will be either a monthly or annual value of the total recuperation amount of the accounts receivable which you will supply the factor with. You must also pay services charges on every invoice amounting to between 1% and 5% of the total value of the invoice. These terms are negotiable before you sign the contract but not all factoring companies will offer you the right to further negotiate once a contract has been signed.
If you are looking for a factoring company to help your cash flow situation, you should find out what the average invoice cost per customer is for their business as different factors specialize in different levels of accounts receivable. For example, while some factoring companies offer low fees for large value invoices, those same businesses will most likely have disproportionately high fees for smaller amounts.
The main benefit of factoring your invoices is so that your business can get some increased monthly cash flow as it can be difficult having all of your money tied up in debts that are owed to you. Clients that are unable to pay on time can cause your business to have trouble meeting its own payments, so it is common for businesses to sell some of their invoices to keep their level of cash flow reasonable from month to month. Unfortunately you can not get anything for free, and the process of invoice factoring will cost you, meaning that you are not going to receive the same amount factoring your invoices as you would if you chased them up yourself.