![]() Whereas traditional factoring is initiated by the “seller” (the provider of goods or services), reverse factoring, also known as supply chain financing, is initiated by the “buyer” (company ordering goods or services). This is more common when a small-business owner has most or all their revenue tied up in a single large invoice and requires immediate cash to continue operating. When both parties come together for a single financial transaction-to factor only one invoice-it’s referred to as spot factoring. ![]() Some businesses factor frequently, while others do so intermittently as needed. One of the major benefits of factoring is that a business can choose which invoices to factor and how often to factor. With non-recourse factoring, you don’t have an obligation to pay the remaining balance if the customer doesn’t pay. With recourse factoring, you are ultimately responsible for paying the factoring company back any amount advanced to you if your customer doesn’t pay. Unfortunately, there is no way to guarantee a company will pay their invoice. The checks a factoring company performs on your customers prior to accepting an invoice for payment go a long way to ensuring the customer will make good on their obligation. Just as there are several ways to use your outstanding invoices to solve cash flow problems, there are several types of invoice factoring too. With discounting, you’re responsible for getting the payments collected, but your customers make their payments into an account that’s managed by your discounting company. Again, with factoring, your factoring company collects from your customers. Invoice discounting is similar to factoring, but the biggest difference is in who collects. However, a true financing arrangement does involve debt, so it’s important to confirm the terms before signing. Is Accounts Receivable Financing or Factoring Considered Debt?įactoring is a debt-free solution because your customers are the ones who pay the balance, not you. Customers are therefore aware when you’re working with a factoring company, but because it’s quite common and factoring companies often make it easier to pay, it’s usually seen as a positive thing. The factoring company is responsible for collecting from your customers, and you have no debt to pay back. You’re essentially selling your invoices to factoring providers at a discount rate. When the term includes the word “factoring,” you’re not borrowing money or taking out a loan. Because you retain the balance sheet, it’s like any other type of loan-your customers will have no way of knowing you’re leveraging it unless you tell them. You’re responsible for collecting from your customers and you’ll pay back your loan with interest in installments. ![]() Therefore, in true accounts receivable financing, you’re borrowing money and using your invoices as collateral. However, the word “financing” references taking out a loan. Invoice discounting, invoice financing or receivable factoring often get lumped into the same group too. Most people don’t differentiate between accounts receivable financing and factoring. Is Accounts Receivable Financing the Same as Factoring? Only well-established companies qualify.Approval based on applicant’s creditworthiness.Application process can take weeks or months.Borrower pays back the principal amount and interest. ![]() Invoice factoring is different from a traditional business loan in lots of ways. Invoice factoring companies help bridge the gap by providing a short-term debt-free working capital solution by leveraging accounts receivables.Īsk Us for More Details Factoring vs. Creating better cash flow control processes can help, but it’s not always enough to overcome cash flow shortfalls, especially when unexpected events occur at the same time outstanding invoices are piling up. In this contract, the factoring company pays the provider a percentage of the face value of an invoice amount and then assumes responsibility for collecting the outstanding invoice amount owed for goods or services by the customer.įind Out If You Qualify What is the Benefit of Using a Factoring Company?Ĭompanies that bill other businesses for goods and services provided often wait weeks or months for the invoice to get paid. More precisely, a factoring agreement is a contract between a provider of goods and services and a financial institution known as a factoring company. Invoice factoring helps businesses solve cash flow shortfalls by providing immediate cash for their unpaid invoices. Ver esta página en español What Is Factoring Finance?
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