What is invoice factoring?
Invoice factoring can be particularly useful for small businesses looking to keep their cash flow moving and their resources consistent. Invoice factoring helps B2B companies boost their cash flow based on their outstanding invoices. This means immediate access to your money without having to wait for payment from clients, which could leave you waiting for 90+ days.
How does invoice factoring work?
Invoice factoring is the process of providing you working capital through the selling of your accounts receivables. You get your money immediately — AND DEBT-FREE — at a discount. According to the Wall Street Journal: “The factor advances most of the invoice amount … after checking out the creditworthiness of the billed customer. When the bill is paid, the factor remits the balance, minus a transaction fee.” Invoice factoring provides immediate access to the majority of funds that your customer owes you, allowing you to keep your business operating as normal. This is especially helpful with businesses struggling with slow-paying clients.
What does “factor rate” or “factoring fee” mean?
When a factoring company advances you money based on your outstanding invoices, it will charge a small fee. The percentage of these funds that goes to the factoring company is what’s known as the factor rate or the factoring fee.
For example, if a factor rate on a $10,000 advance is 3%, the company would take $300 as a fee. Remember, this is debt-free capital that you can use to make investments, purchase equipment or pay your staff. Usually, the rates will range between 1% and 5% depending on various criteria. Invoice factoring can be a useful service for small and large businesses alike looking to keep their cash flow consistent.