Economy

What is Invoice Factoring?

What is Invoice Factoring?
What is invoice factoring? Simply put, invoice factoring is the conversion of outstanding invoices into cash for small businesses by a factoring company. The option is available to businesses that use invoices to claim for money from either government agencies or other businesses.

The Invoice Factoring


Invoice factoring companies pay the money in two installments; 80% as an advance and 20% upon invoice payment.

Here's how invoice factoring process works.

  • Your business provides goods or services to a customer and issues an invoice to the client.

  • You look for a factoring company and sell them the outstanding invoices.


The factor has to determine if you're eligible. If you pass the eligibility test, the company will ask you to sign an agreement. Please note that the company also has to investigate a customer's creditworthiness.

  • The company will pay you an 80% advance and 20% balance once the customer pays.


 

Please note that your client will pay the amount owed directly to the factor.

Invoice factoring costs. 

You can borrow up to $ 10,000 per month with a discount rate of between 0.5 and 5 %.

Why do companies use invoice factoring?


A factoring company provides fast financing as opposed to having to wait for 90 days until your customer settles the amount owed.

Invoice factoring is a better alternative to bank loans as processing bank loans could take a long time. Bank loan interests are often very high, which could be expensive for businesses.

Knowing what is invoice factoring can help your business obtain operating capital as it awaits the customer's 90-day payment period.