How does Invoice Factoring work?

Invoice factoring is a financing arrangement in which a business sells its outstanding invoices or accounts receivable to a third-party financing company, called a factor, in exchange for immediate cash.

How does Invoice Factoring work?

Invoice factoring is a financing arrangement in which a business sells its outstanding invoices or accounts receivable to a third-party financing company, called a factor, in exchange for immediate cash.

Here’s how invoice factoring typically works:

  1. The business provides goods or services to its customers and issues invoices with payment terms (such as net 30 or net 60).
  2. Instead of waiting for the customers to pay the invoices, the business sells the invoices to a factoring company. The factoring company typically advances a percentage of the invoice value to the business (often 80% to 90%).
  3. The factoring company then takes over the collection of payments from the customers. When the customers pay their invoices, the factoring company subtracts its fees and remits the balance to the business.
  4. The factoring company may charge fees for its services, such as an application fee, a discount fee (the cost of the advance), and interest or other charges for any unpaid invoices.

Two Main Types of Invoice Factoring

There are two main types of invoice factoring: recourse and non-recourse. In a recourse factoring arrangement, the business remains responsible for any unpaid invoices and may have to buy them back from the factoring company if they are not paid within a specified time frame. In a non-recourse factoring arrangement, the factoring company assumes the risk of non-payment and absorbs the losses if the customer does not pay.

What Kind of Business is Invoice Factoring Good For?

Invoice factoring can be a good option for businesses that need to improve their cash flow or that have difficulty obtaining traditional financing due to limited credit history or collateral. However, it’s important to carefully evaluate the terms and fees of any factoring arrangement before signing a contract.

Ready to explore the possibilities? It’s time to take action! Contact us today for a personalized consultation and discover how Plan B Capital can help you overcome financial obstacles and turn your dreams into reality. 📞📧

0/5 (0 Reviews)

More Insights

alternative lending cash discount program
How can adding a Cash Discount Program improve your business?

When a business accepts credit card payments, it incurs processing fees from the card companies and payment processors. A cash discount program allows businesses to pass on these fees to customers who pay with credit cards, reducing the overall cost of payment processing for the business.

Read More
alternative commercial real estate loans
What is an Alternative Commercial Real Estate Loan?

What is an Alternative Commercial Real Estate Loan? An alternative commercial real estate loan is a type of financing that is provided by non-bank lenders, such as private equity firms, hedge funds, or specialty finance companies. These lenders typically offer loans that are outside the traditional lending criteria of banks and other financial institutions, and

Read More
alternative lending invoice factoring
How does Invoice Factoring help my business?

How does Invoice Factoring help my business? Invoice factoring can provide several benefits for businesses, including: Improved cash flow: Invoice factoring can provide a quick injection of cash into your business, as factoring companies typically advance a percentage of the total value of your outstanding invoices (often 80% to 90%). This can help you manage

Read More
Scroll to Top

Need Help To Maximize Your Business?

Reach out to us today and get a complimentary business review and consultation.