Invoice financing has fast become one of the most popular and in demand ways of raising the needed resources or capital among entrepreneurs today. It’s charm lies in the truth that it does not create the same consequences as that of bank loans and other forms of credit. As a matter of fact, it does not appear as a liability in one’s financial statements either. So exactly how does invoice financing work? Read on to find out.
Per definition, single invoice financing is a form of short term borrowing that allows an entity to draw cash against its sales invoices before the customer has sent in partial or full payment. Let’s take it step by step.
First, the entity chooses which invoices it will subject to the financing and when. The company will have to decide whether it prefers complete or single invoice finance. In the case of the former, all customer receivables will be subjected to the service for every period, often on a monthly basis, for a specific period of time. The latter on the other hand is individual in nature so the company gets to handpick which invoice it would like to use as well as how often they would like to do so. The choice is often directed to those receivables that have significant values or those that pose threats of un-collection.
Second, it sells the right to collect against the chosen invoices to the provider. The reason why this financing method does not fall under the category of a debt is because it is in fact a sale of an asset. The right to collect is passed on from the company to the financial provider. The latter provides an amount that is at least eighty percent equivalent to the value of the invoice/s with the balance to be forwarded after full collection from customers is achieved.
Third, collection is performed by the provider and the company uses the funds as deemed necessary. The financial provider now bears the responsibility of collection. In some agreements should a customer default in payment, the loss is borne by the financing company. This allows for reduction in losses from bad debts.
Fourth, once collection is completed the balance is then forwarded. After collection from customers, the invoice financing company will now forward the remaining balance less fees to the company.
Factoring companies offer invoice financing services that allows business entities to raise funds and capital through their customer receivables. In such an arrangement, the company advances an amount equivalent to around eighty to ninety percent of the value of their chosen invoices with the balance less fees forwarded only upon full payment is received from owing customers. The burden of collection will also be transferred to the factor.
There are benefits to this type of financing that has made it one of the most widely used in the business world today but just like anything else using them in the wrong ways will earn you a migraine. This is what makes it important for business owners and entrepreneurs to get to know the service more. To help you with that, we’ve come up with a list of do’s and don’ts when working with factoring companies.
Do your research well. There are many factoring companies out there so it is you job to find who they are and get to know them better. No two are exactly the same so be sure to research well. Make a list, compare them to your qualifications and short list your candidates.
Do read client reviews and feedback. To know about how quality driven they are, it is best to ask people who have experienced their services firsthand. You can do this in many ways from reading forums and blogs to calling up people personally.
Do understand every clause and sentence you are agreeing to. Again, no two factoring company is the same. They will have varying clauses to their terms and conditions and different processes. Before you sign into any agreement or contract, be sure that you understand every word there is to it.
Don’t settle for lackluster quality. If you want to make the most out of your invoice receivables then do not settle for less. Always go for gold.
Don’t go for the cheapest rate in a heartbeat. Entrepreneurs want to be cost efficient but do not let quality suffer. Just because a certain factor offers very cheap and rock bottom rates do not mean that you have to settle with them. There are other factors to consider and not just price.
Don’t use factoring without knowing what it is. If there are things that confuse you about the financing method, go ahead and ask the factoring companies you are dealing with. They will most willingly love to enlighten you and keep your facts straight.
In the world of invoice financing, many people find discounting and factoring confusing. Others say that they are one and the same while there are those that insist their huge difference. If you find yourself in the same state of bewilderment then you are in luck as Working Capital Partners is here to clarify the matter for us.
First things first, let us define what invoice financing is all about. As per definition, it is a type of short term borrowing that allows a business to draw cash against its customer sales invoices before the said customer has turned in their payment. In many cases it is used to improve a company’s working capital and cash flow, provide for emergency expenditures and to hasten collections.
What makes it different for regular forms of borrowing is the fact that it does not require collateral in the form of fixed corporate assets. It can also be processed in a matter of days or even in as fast as twenty four hours. Moreover, it does not appear as a liability in the financial statements but rather a decrease in receivables and an increase in cash. It also frees up the amounts locked in within the invoices relatively earlier than when it should have been, that is at the date of customer payment.
To answer your dilemma about factoring and discounting, the two are alike in two areas. First, both create and bring up the same benefits and advantages. This includes an improved cash flow, available resources, hastened receivable to cash turnover and lesser bad debts to name a few. Second, they both provide for an advance of the value of the invoice/s subjected to them. As for their differences, read on below.
In factoring, the company brings their receivables to the financial provider who in turn provides for the advance which is an equivalent of eighty percent or higher of the invoice’s value. The same provider carries on the task of payment collection from the customers. Once that has been achieved in full, the remaining percent less fees will be forwarded to the company.
On the other hand, discounting still provides for the same advance however the responsibility regarding collection remains with the company. Once collection has been completed, the company then comes back to the financial provider to repay them plus the fees.
Hopefully, the Working Capital Partners have helped clarify things for you after reading through this article.
These two words may sound a little foreign to most people but definitely not to businesses. Single invoice or spot factoring is the strategic process of raising financial resources against individual invoices. Here, cash is released which are still locked up. It is a business financing solution which enables a business to receive cash in advance on a single outstanding invoice. Companies involved in this provide their clients their needed resources by financing client invoices as they are generated and as they are needed.
There are some companies which are hesitant about factoring as they are afraid of getting tied up in lengthy contracts and on going commitments which in the long run can be fatal to them. Here the beauty of spot factoring comes in. It is a one time basis and unlike other factoring contracts, they won’t hold you down for far much longer than you would want to.
When looking for spot factoring companies there are three essential elements for you to consider and to study about. The first two are the size and amount of your invoice while the third is about customer impact.
These said companies will check upon your invoice, confirm that your products or services have indeed been delivered or rendered and then underwrites the credit worthiness of the debtor. When these are accomplished, they will advance a percentage of the invoice to the business which will depend upon the agreed proportion. The balance will then be released when the invoice has been fully paid.
Companies use this for several different purposes like unexpected expenses, the need to fund an important and urgent project, for extra income, a boost in employee morale, opportunities for growth and a better chance at reaching out and influencing the general community. Do know that those are only a few of the many things companies encounter that make them need spot factoring.
Whenever businesses urgently need financial resources for whatever reason and cash is not readily available, they would often reach out to banks or lending institutions where they acquire debt. This has been a common practice but is often frowned upon as a heavily indebted company is in very risky waters. When credit risk is so high, investors can get skeptical and scared that they might withdraw. So most companies would then turn to spot factoring. It does not incur them any debt and at the sane time it provides them with the resources they need.