Invoice Finance - Factoring Accounts Receivables To Fund Your Business Needs

Small businesses without established relationships with banking or other traditional funding sources very often find it difficult meet the needs to grow their business. Funds are needed most importantly to make payroll, pay taxes with a close second being funds needed to finance new jobs and purchase equipment. Without an established relationship with a local bank, finding a funding source can be difficult.

Invoice finance or factoring is one way for newer, less established companies to access funds needed to meet operational requirements. Invoice financing or factoring as it is called within the financial industry. In a factoring transaction, the business will utilize assets owned by the business, in this case an outstanding invoices issued to it’s customers in exchange for immediate cash. This transaction is not to be mistaken for invoice discounting which is a loan from a financial institution that is collateralized with a one or more outstanding invoices.

A business loan is a transaction between two parties for example, between a business and a bank. Factoring transactions require three parties to be involved in the process which include the business itself, the finance company known as the factor and the debtor in which the invoiced is issued too, the business’s customer. The accounts receivables invoices are basically a asset that will now become the property of the factor. This invoice was originally issued in the beginning by the business for services performed or goods sold to the debtor.

Since the new and less established business does not have a readily available source of cash, he will sell the invoice accounts receivables to the factoring company at less than the total value of the invoice. This is the factor’s profit. In return, the factor will issue an agreed upon discounted amount of cash to the business which provides the business with needed operational funds. Once the transaction is completed, ownership of the invoice is transferred to the factor which is now assumes all risk associated with collecting the outstanding balance from the debtor.

The debtor is made aware of the transaction usually before the transaction is finalized since the debtor will now be responsible for making payments directly to the factoring company rather than the business which provide the goods or service as outlined on the invoice. In many cases a new invoice or bill will be issued or if payments are made in installments, the factoring company will send monthly bills to the debtor. It is also important to note that no further collections on the part of the business toward the debtor should be made for the invoice in question since all rights to the invoice were given up as a result of the invoice factoring transaction. If this is done, the business could put further business transactions in jeopardy should the business require the factors service again for future cash flow needs.

As outlined above there 3 different parties involved in the factoring accounts receivables transaction. Equally so, there are thee different parts to the factoring transaction as well. The discounted amount received by the business for sell of the invoice that was paid upon completion of the transaction, the remaining balance still outstanding on the unpaid portion of the invoice or reserve which is the responsibility of the debtor. The last remaining or third part of the transaction fees associated with the factoring transaction. This fee can vary between invoice factoring companies, but is usually with a few percentage points of any other factoring company. These fees are determined on various underwriting guidelines such as the period of time the factor must wait for full payment of the invoice from the debtor, credit worthiness of the debtor and whatever other factors established by individual factoring companies.

Although more expensive than a traditional loan from the local bank or a line of credit, invoice factoring accounts receivables is sometimes the only choice a small business has to meet pressing needs and requirements to keep his business running. Until such time that the business can establish a relationship with the local bank, it must utilize all forms of cash flow strategies to maintain a positive cash flow to keep the business up and running. Invoice factoring accounts receivables is a ready source of cash using company assets.