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What Is Invoice Factoring?

Turning Unpaid Invoices Into Financial Assets: Factoring Accounts Receivable

Invoice FactoringIf you represent a company that primarily deals in business-to-business transactions and you’re looking to immediately improve your cash flow or to acquire capital fast, you might want to consider invoice factoring.

Factoring is the process of selling accounts receivable (meaning unpaid invoices) to a financial firm. The invoices are sold at a discounted rate to generate capital up front, while the invoice factoring company then collects the full amount due from the seller’s customers and profits off of the difference.

Factoring is becoming an increasingly popular choice for small businesses that are struggling to find financing. Times are tight and lending practices have become more restricted, making factoring an appealing option for many businesses. It also takes the onus of assessing credit and risk as well as collecting on outstanding debts off of the seller’s plate—simplifying the process of working with (and getting paid by) other businesses.

Requirements for Accounts Receivable Factoring

Factoring treats invoices as potentially valuable financial assets. Unlike a bank loan, which looks at a business’s overall financial portfolio and total assets, factoring is entirely focused on the value of accounts receivable.

Of course, they are only truly valuable if someone can collect on them. That means that your customers must have good credit in order for you to be able to sell your invoices to a third-party factoring company. Factoring companies want to make sure they won’t take a loss by buying invoices that will never be paid, after all, as they typically assume the credit risk along with the purchase.

Why Use Business Factoring?

If the turnaround on your unpaid invoices is too long to make ends meet, factoring can provide the necessary capital to keep your business afloat or to pay off outstanding debts. It can also be a quick and easy way to purchase new equipment or to expand your business without depleting working capital.

Whether you want to grow aggressively or simply need a quick cash infusion to keep things running, factoring is worth considering. With financing options for small businesses more limited than they have been in decades, factoring can spell the difference between success and failure for a company. Over the long term, it can even bolster your company’s financial standing and help you to secure other forms of financing.

Author:

After graduating with a B.A. from Occidental College, Ben Wills worked for several political non-profits on economic policy, government transparency, and public accountability issues.