If your business has occasional or seasonal cash flow challenges, invoice factoring is an option you may wish to consider. Generally, invoice factoring companies make two payments. The first one is made immediately when the invoice is sold and the second one is made when the customer pays off the invoice.
Invoice factoring is a means through which your business can effectively sell some of the ownership of specified invoices and your rights to the money due under the terms. The factoring company will typically pay you in the region of between 80% to 90% of the invoice amount immediately.
After your customers pay the factoring company for the full value of the invoice, they’ll pay you the remaining amount, minus their fee. Invoice factoring can be an ideal solution for your business if you are looking to save time chasing payments.
This allows for the release of funds from unpaid invoices the moment they are raised, while you maintain control over the collection of payments. In effect, it’s like having an overdraft facility that’s secured against your accounts receivables.
After you raise invoices for goods or services, the discounting company lends your business an amount commensurate to the full value of the invoices, minus a small percentage. Then, after you receive payment from your customers, you repay the loan, plus an agreed upon fee to cover the cost, interest, and risk.
The customer being issued the relevant invoices are not informed that your company is outsourcing the payment collection. For some companies this confidentiality is seen as an important gain and therefore they will prefer discounting to factoring.
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