{"id":8708,"date":"2022-01-28T20:19:33","date_gmt":"2022-01-28T20:19:33","guid":{"rendered":"https:\/\/www.ownr.co\/blog\/?p=8708"},"modified":"2023-12-07T13:37:30","modified_gmt":"2023-12-07T13:37:30","slug":"what-is-invoice-factoring","status":"publish","type":"post","link":"https:\/\/www.ownr.co\/blog\/what-is-invoice-factoring\/","title":{"rendered":"What is Invoice Factoring?"},"content":{"rendered":"

Small businesses and entrepreneurs don\u2019t always get paid immediately upon sending an invoice. Depending on your contract, agreement, and specific industry standards, you may not get paid for up to 90 days (or more) after completing work and<\/span> submitting an invoice<\/span><\/a>.<\/span><\/p>\n

During that waiting period, you\u2019re still responsible for fulfilling <\/span>your<\/span><\/i> payment obligations to others. Rent, payroll, and other business expenses continue to add up and must be paid while you\u2019re waiting to receive payment for your invoices.<\/span><\/p>\n

Invoice factoring helps businesses maintain cash flow before invoices come due. With invoice factoring, a business sells an invoice to a third party in exchange for the value of the invoice, minus a fee or commission.<\/span><\/p>\n

How Does Invoice Factoring Work?<\/b><\/h2>\n

Invoice factoring<\/span><\/a> involves three parties:<\/span><\/p>\n

    \n
  1. The original business to which an invoice belongs (you)<\/span><\/li>\n
  2. The client or customer who owes money to the business<\/span><\/li>\n
  3. A factoring company, called a factor<\/span><\/li>\n<\/ol>\n

    With invoice factoring, the original business transfers the ownership, rights, and, in some cases, risks of an <\/span>accounts receivable<\/span><\/a> to a factor. The client or customer must then pay the factor rather than the original company that provided the goods or services.<\/span><\/p>\n

    As a trade-off for accepting the risks of an outstanding invoice, the factor earns a fee or commission paid through the value of the invoice.<\/span><\/p>\n

    In exchange, you receive an immediate upfront advance, <\/span>generally equivalent to 85 percent<\/span><\/a> of the invoice value, minus the cost of the fee or commission paid to the factor.<\/span><\/p>\n

    When the factor is paid in full by your client or customer, the remaining balance is transferred to your business.<\/span><\/p>\n

    An example of invoice factoring<\/b><\/h3>\n

    Assume you sell an invoice with a value of $10,000 to a factoring company. Based on the <\/span>payment terms<\/span><\/a> you agree to, the factor sets the factoring fee at one percent, or $100, which means you will be paid $9,900 for the invoice.<\/span><\/p>\n

    Your initial advance of 85 percent, minus the one percent fee, equals $8,415. Once the factor is paid in full by your client or customer, you receive the remaining balance of $1,485, for a total of $9,900.<\/span><\/p>\n\n\n\n\n\n\n\n
    Initial invoice value<\/b><\/td>\n$10,000<\/span><\/td>\n<\/tr>\n
    Factoring fee (1%)<\/b><\/td>\n$100<\/span><\/td>\n<\/tr>\n
    Initial advance after fee (85%)<\/b><\/td>\n$8,415<\/span><\/td>\n<\/tr>\n
    Remaining balance (paid after invoice is paid in full)<\/b><\/td>\n$1,485<\/span><\/td>\n<\/tr>\n
    Total amount received<\/b><\/td>\n$9,900<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Is Invoice Factoring Right for Your Business?<\/b><\/h2>\n

    Invoice factoring is a viable option for B2B (business-to-business) businesses that invoice for goods sold or services performed. Factoring isn\u2019t effective for businesses that receive payment immediately from customers, such as retail stores.<\/span><\/p>\n

    If you typically expect a delay between invoicing a customer and receiving payment, invoice factoring may be right for your business.<\/span><\/p>\n

    Can Any Business Use Invoice Factoring?<\/b><\/h2>\n

    Invoice factoring only makes sense for businesses that earn income via invoices. Invoice factoring mitigates the delay between sending out an initial invoice and receiving payment; factoring isn\u2019t effective for businesses that are paid in full immediately after selling a product or performing a service.<\/span><\/p>\n

    When Should Your Company Use Factoring?<\/b><\/h2>\n

    Invoice factoring is ideal for businesses with outstanding invoices that suffer from cash flow issues. In other words, if bills and other expenses are coming due before your company expects its outstanding invoices to be paid, factoring may improve your short-term cash flow so you may fulfill your debts and other financial obligations.\u00a0<\/span><\/p>\n

    How Much Does Factoring Invoices Cost?<\/b><\/h2>\n

    The cost of invoice factoring is determined by the creditworthiness of your clients and customers. Because the factor is taking on the risks associated with your unpaid invoices, such as late payments or nonpayments, your customers\u2019 ability to make payments on time directly impacts the fee or commission a factor charges.<\/span><\/p>\n

    The factoring fee, or discount rate, is often <\/span>between one and five percent<\/span><\/a> of the invoice\u2019s total value. Some factors may also charge an application fee.<\/span><\/p>\n

    How Does a Factoring Company Buy Invoices?<\/b><\/h2>\n

    Once your business fulfills its obligations to another business (by providing products in full or completing a service), you may sell the outstanding invoice to a factoring company. In doing so, the rights to receive payment from your customer are transferred to the factoring company.<\/span><\/p>\n

    \u00a0<\/span>How Can a Business Apply for Invoice Factoring?<\/b><\/p>\n

    Though invoice factoring<\/span> isn’t a loan<\/span><\/a>, the application process is similar. Upon finding an invoice factoring company, you must submit an application for consideration. You will be required to provide supporting documentation, including<\/span> information about your<\/span><\/a>:<\/span><\/p>\n