Invoice factoring (also known as receivables financing, invoice financing or AR factoring) is a business finance tool that expedites cash flow by leveraging a company’s assets: namely, its unpaid receivables.
Instead of waiting on customer payments, a business can sell the invoice to a factoring company and get immediate advance of a high percentage of the invoice total, for a small fee (called a factoring fee). Once the customer has paid the invoice, the business also receives any amount held in reserve.
Assuming a factoring fee of 5%, and an advance rate of 90%, here’s how it would work:
||Generate a $15,000 client invoice and factor it
| – Same Day
||Receive an advance of $13,500 (90% advance)
||Factoring company earns $750 (5% factoring fee)
||Your company receives the $750 reserve amount after the invoice is paid
When a company factors an invoice, they sell the invoice to an invoice factoring company. Instead of waiting weeks or months for customers to pay, they can factor the customer invoice and receive an advance on the invoice within 1-2 days.
Find out more about receivables financing to see how much working capital you could unlock by factoring – or selling – customer invoices instead of waiting on payments.