Understanding Invoice Factoring

One of the side effects of the current recession is that business financing has become hard to get

. A few years ago, business credit was flowing and companies could shop from bank to bank looking for the best terms. Nowadays, even companies that have solid financial statements are having problems getting a business loan. This situation is not likely to change for the foreseeable future as many lending institutions have capitalization problems and won't be able to lend much until these problems are solved.

Because of this, many companies that need business financing will need to find an alternative - or do without. One alternative that has been gaining popularity is invoice factoring.

Invoice factoring is designed to solve the cash flow problem that are generated when clients pay their invoices in 30 to 60 days. While extending 30 day payment terms is common for commercial clients, many small and midsized companies can't afford to wait that long to be paid. They have a number of expenses that need immediate handling, such as supplier payments, payroll and rent. Factoring invoices can reduce the days outstanding on invoices substantially, putting your company on a solid financial footing.

The mechanics on invoice factoring are fairly simple. Once the work or product for an invoice is delivered, you sell the invoice to an intermediary company called a factoring company. The factoring company examines the business credit of the company paying the invoice (your client), and if acceptable, buys the invoice from you at a small discount. This provides a quick source of funding that can be used to cover operational expenses and grow the company.

Most factoring transactions are structured with two payments. The first payment, called the advance, is for about 80% of the invoice amount. The second payment, which is for the 20% reserve (less fees), is rebated once the invoices is actually paid in full.

The biggest advantage of factoring is that it's easy to obtain. Most small and medium sized companies can get it, provided they have solid clients and no encumbrances on their assets. This makes invoice factoring an ideal solution for companies that cannot afford to wait 30 to 60 days to get paid by their clients.

by: Marco Terry

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