If your business delivers particular goods or services to another company, an invoice is typically created during the life of the transaction. The average invoice may be paid within 20 or 30 days, but more time can elapse before the invoice is paid in full and the seller receives their funds. However, instead of waiting for payment, a business has the choice of receiving an immediate advance via a factoring company. This means that a delayed billing cycle will in no way concern (or jeopardize) the overall finances of a company in this kind of situation.
Factoring is a form of secured funding involving the selling of invoices for instant cash at a discount to a factoring company that acts as an outsourced credit agency. Also known as "accounts receivable factoring," the funding goes to a credit department who collects and manages the entire payment process, which is a highly useful service for any small business. Many small businesses will therefore not need to spend time managing payments or taking the time to make lots of collection calls. It also streamlines the payment process so that no-one wastes time trying to decipher if certain invoices have been paid and which ones are left outstanding.
As such, invoice factoring can help to eliminate any serious cash flow problems that a small business might be experiencing at a certain period of time. Instead of requesting a bank loan, outstanding invoices are simply purchased by a factoring company. Some factoring companies can charge a one-time setup fee when a business accepts their terms of contract, while others may choose to relinquish the fee (although this is generally dependent on the length of the factoring contract, and the amount of product involved).
The concept of invoice factoring harks back to the days of King Hammurabi of Mesopotamia over 4,000 years ago and was predominantly used in the Middle Ages throughout countries such as Spain, England and Italy. In fact, its origins in the United States might have been due to the first English colonists settling in America who created a precedent, as many London-based bankers touched down on U.S. shores. In the 1920s, invoice factoring was used extensively across both the textile and garment industries.
Nowadays, because many large banks are restricting the amount of small business loans they offer, invoice factoring has become a more popular alternative financing method. Seasonal businesses may use invoice factoring because the majority of their sales come during the summer months and they see almost no trade during the winter. These types of businesses are often unable to get a bank loan because the overall total of their sales is wholly inconsistent and can wildly fluctuate through the year.
Invoice factoring provides you with quick access to your money so that your business can pay its bills, meet payroll expectations, purchase additional inventory and extra equipment, as well as being able to manage your overheads. Many Fortune 500 companies have used accounts receivable financing to enhance their business growth in recent years.