What is Invoice Factoring?
When you’re trying to collect on Accounts Receivable, you’d prefer to get paid on time, but that’s not always the case. You end up wasting valuable time chasing down your clients and asking them to pay their invoices. That’s time you should be spending on other important business activities.
Fortunately, there’s invoice factoring. Here’s how it works.
Stop Chasing Your Invoices
Factoring frees up your time and lets you turn over your Accounts Receivable to a third party. This company then pays you a discounted amount on what your client owes you. So say you have an invoice for $1,000 you know will be a challenge to collect on. You hand it over to your factoring partner, who then pays you $800.
Once the company collects on your invoice, you’ll be paid a reserve minus the discount fee: the remainder of the invoice amount that’s held until the payment is made. The factoring company, of course, gets its cut (the discount fee). Typically this discount fee is between 2 and 7% of the invoice amount. You don’t get the full amount of what the original invoice billed for, but you’re paying for the effort the factoring company will have to put in to get the original invoice paid.
That company then handles getting the invoice paid. They act on your behalf to collect the payment due.
With factoring, there are three parties involved:
● You, the company seeking to get paid
● The debtor (your customer)
● The factor
The factor is the company who will pay you in advance of collecting the money and act on your behalf to collect on the invoice. Essentially, the factor takes over ownership of your debt.
Why Factoring Works
Cash flow is important to any company, and if you have a great deal of your revenues tied up in unpaid invoices, you know this prevents you from paying your own suppliers or expanding your business.
With factoring, you keep cash flowing. You eliminate the hours you were wasting on begging clients to pay their bills. The headache is gone.
Tying in Factoring with Electronic Invoicing
At InvoiceSharing, we’re diligently working to provide you more ways to maximize your Accounts Receivable. To that end, we’re partnering with invoice factoring companies who will work with you to get your invoices paid promptly. Watch the news later this week!
Drs Jeroen Volk RA