How Invoice Factoring Works

How Invoice Factoring Works

What Every Business Owner Must Understand About Invoice Factoring

Your company’s cash flow is essentially the lifeblood of your operation. Without it, you won’t be in business too long. Finding ways to make the best use of that cash flow will position your business for growth. One of the strategies that many owners employ is known as invoice factoring.

How Does The Process Work?

This approach to managing your revenue stream involves finding a partner who is willing to purchase batches of invoices and provide you with a lump sum that amounts to the majority of the face value of those invoices. Typically, the amount of that lump sum will be in the range of 70% to 80% of the batch’s total face value. Some partners may choose to use a higher percentage for that lump sum payment, depending on the credit score of your company and how quickly your clients have traditionally remitted payments.

In return for providing the lump sum, you agree to have your customers remit payments directly to the partner. It’s not unusual for the partner to provide a remittance address to a lockbox for security reasons.

As the payments are received, they are credited to your account. Once the total of the lump sum payment is recouped, the partner begins to release additional funds for your use. All that’s kept is an agreed upon percentage in exchange for providing the advance funding.

Are There Limitations On How the Money is Used?

Your funding partner places no limitations on how the disbursed funds can be used. That allows you to set aside part of that lump sum to cover the payroll while another portion is earmarked for paying your vendors. You can also use some of the money to fund a new product launch, cover the costs of exhibiting at a trade show, or any other activity that maintains and strengthens your business.

Tracking the Inbound Payments

Many funding partners provide debtors with online access to their account information. That makes it easy to log into the account and view an updated report of how much money was received the last business day and how much is still outstanding. Downloading reports that detail which invoices have been paid makes it easy for you to keep your Receivables up to date. You’ll also be able to cross-reference that data with your own records and see which customers have not sent in their payments yet.

What About Collection Efforts?

You already know that a small percentage of your customers pay in the 30 to 60 day range. Some may go beyond that. Keep in mind that when your funding partner chooses to purchase those batches of invoices, you are also agreeing that the partner can make reasonable attempts to collect past due invoices.

As part of the advance planning, talk with a partner about how collection efforts proceed. What happens when an invoice passes the 30 day mark? What if it rolls past 60 days? Knowing what sort of collection attempts are made helps you to support the effort and ensure customers do remit payments in a timely manner.

Liability and Unpaid Invoices

Most funding partners have procedures in place that address the debtor’s financial liability when customers fail to remit payments. You will likely find that the total due on those invoices is deducted from any future funds disbursed to your company. The partner may also choose to no longer accept invoices related to that customer.

Once a factoring arrangement is in place, you’ll find that this approach to managing your cash flow has a number of advantages. Talk with an expert today and learn more about how the program works. There’s a good chance that it will be just what you need to move your company to the next level.