Business

What is Invoice Factoring and How Does it Work?

What is Invoice Factoring and How Does it Work

Nowadays, many businesses have cash-flow issues that can lead to more serious financial problems. In most cases, cash-flow problems occur when invoicing is involved. In order to provide more convenience to customers, companies allow them to purchase products using a line of credit. In other words, customers don’t have to pay for what they bough straight away. 

Unfortunately, this creates negative cash-flow as companies have sold products but have not yet been paid for them. In such cases, alternative lenders like ArK Kapital, for instance, offer invoice financing loans to help such companies mitigate the risks of a negative cash flow. With that in mind, let’s have a look at what invoice factoring is and how it works.

How does invoice factoring work?

Invoice factoring is a type of financing in which a business sells its accounts receivable (invoices) to a third party (factor) at a discount. The factor provides the business with an advance payment, which is typically 70-80% of the value of the invoice, minus any fees. Once the customer pays the invoice, the factor remits the remaining balance, minus its fee, to the business.

How much does invoice factoring cost?

There is no one-size-fits-all answer to this question, as the cost of invoice factoring will vary depending on a number of factors, including the size and creditworthiness of your business, the type of invoices being factored, and the length of time over which you plan to factor your invoices. However, as a general rule of thumb, businesses can expect to pay a certain percentage of a specific fee for the factoring service.

When is the best time to use invoice factoring?

As mentioned before, a lot of companies allow customers to pay for products using a line of credit. Instead of paying right away, customers get an invoice with a specific amount that needs to be payed, as well as a specific date when the invoice is due. This data can range anywhere between 30 to 120 days. 

During that time, companies have their own expenses to worry about, such as employee salaries, taxes, bills and so on. If a company doesn’t have cash reserves to cover those expenses, they are forced to declare bankruptcy. It’s better to use invoice financing in that case than to close down shop. After all, this way the company gets paid at least 70% of what the invoices are worth and they get the remaining 30% after the customers have covered the invoice. 

Invoice factoring is a good way to deal with negative cash-flow issues. More often than not, businesses need this type of financing mainly because they have difficulties obtaining different types of loans or capital. 

Related posts

How Search Engine Optimization (Seo) Is Helping Small Businesses Grow?

Nehita Abraham

Top Reasons Contracts are Broken

Akarsh Shekhar

4 Business Tech Trends for 2021

Nehita Abraham

Leave a Comment