No more invoices to process, no waiting for clients to pay, and best of all immediate cash in hand—invoice factoring simplifies your bookkeeping experience and helps you get paid on time every time. Now, even though you’ve sold a lot of goods, you don’t have the immediate cash flow to pay your employees, because https://www.bookstime.com/articles/accounting you haven’t received your payments yet. If the factoring company buys your outstanding $10,000 invoice and they charge a factoring fee of 3%, they stand to profit $300. This graph represents a non-recourse factoring process which is the case when the invoice ownership is transferred to the factoring company.
The factoring company also assumes responsibility for collecting on the invoice. One of the main benefits of invoice factoring for your business is immediate access to cash. By selling your unpaid customer invoices to a factoring company, you can receive around 70% to 95% of the total invoice value upfront, improving the cash flow for your company. Even better, invoice factoring usually has a quick approval process compared to traditional bank loans. This helps businesses secure funds quickly without going through tedious paperwork and lengthy credit verifications. The discount rate is the fee a factoring company charges to provide the factoring service.
How to Apply for Invoice Factoring
It is not unheard of to believe that factoring puts a strain on a company’s customer relationships again implying financial troubles. However, factoring is a common and widely accepted practice in business. The factoring company typically operates discreetly, and customers are usually fine working with a third-party factor in the transaction. Rather than purchasing a certain number (or all) of your invoices, spot factoring allows the contractor to pick one or a few specific invoices that will be purchased by the factoring company. While spot factoring does offer unique benefits over traditional factoring, it can be slightly more difficult to obtain. The factoring company charges a 1% fee for every week it takes your customer to repay the invoice.
