Finance

What is Invoice Discounting and Invoice Factoring?

Romans were the first to offer promissory notes at a discounted price, launching the industry of factoring. America’s success was largely due to the potential of factoring. When colonial businesses were factored in return for large returns, Europeans invested cash. Government bonds use the same principles as businesses when they engage invoice factoring.

Factoring an invoice is simply the sale of the rights to collect money owed on outstanding invoices. Businesses engage in invoice factoring when cash is needed quickly or they have customers who are slow to pay and lack the resources to set up an accounts collection department. While some companies can get accounts receivable financing through regular banks, others are large enough to be able to access invoice factoring services.

To get quick cash, invoice factoring is used by many businesses. Cash is crucial in today’s fast-paced business environment. The sale of futures on your invoices can help you get the cash you need right away to acquire customers and propel your business forward.

Factoring invoices is not a loan. It is a direct sale of assets. It can be viewed as a cash advance. You give up a portion of the future cash you expect to receive in return for today’s cash. Some companies purchase invoices upfront, while others will pay you a downpayment towards the invoice. The balance, less their fees, will be paid to you when the customer pays. Invoice factoring is great because your credit does not matter. Your customer’s credit will qualify the invoice for factoring.

Factoring invoices is available to many industries.

  • Transportation
  • Manufacturers
  • Distributors
  • Wholesalers
  • Staffing and consulting companies
  • Telecommunications companies
  • Service providers

    Industries that have a lot of cash and are able pay their payroll are the most likely to benefit from invoice factoring. Any business that has at least ten million dollars in receivables should be eligible to use invoice factoring provided they have secured creditworthy customers.

    Invoice factoring might be an option in other situations, such as:

  • Young company with creditworthy customers but not enough credit history to allow your business to be creditworthy by banks
  • A company that has the need to take advantage of limited sales and profit opportunities but lacks the cash flow.
  • Companies with income, tax, or credit problems
  • Companies that filed for bankruptcy are likely to turn a profit
  • Companies that grow too quickly for available capital to meet business needs
  • Companies that are poised for rapid growth don’t want to take on debt
  • Companies that are experiencing rapid growth but lack the credit score to be able to obtain bank loans.
  • Companies that are starting up with little capital
  • Companies that have seasonal sales patterns or inconsistent sales patterns

  • molw.net

    We are a team of professionals with each having two decades of experience in start-ups, sales, marketing, finance, HR, large scale project and profit centre management and running mature cross functional operations. At Molw.net we are big believers that knowledge transfer is critical to our industry’s evolution. We love to share our experiences and learnings through our online resources.

    Related Articles

    Back to top button