The Ins and Outs of Invoice Factoring
One of the most unexpected challenges new businesses face is unpaid – or slowly paid – invoices. This often negatively affects a company’s cash flow, which in turn can exacerbate an organization’s accounts payable department. In other words, when customers fall behind on their bills, companies can fall behind, too. There is a solution, however: accounts receivable financing.
Accounts receivable financing, often called invoice factoring, can boost a business’s working capital. Not only does in solve cash flow issues, allowing a company to cover its bills, pay its employees and purchase needed supplies, it also helps reduce stress on staff. However, the solution doesn’t come without risks.
What You Need to Know About Invoice Factoring
To start, a factor is a third-party company that purchases accounts receivable invoicing. When you engage with a factor, the first thing it will do is explore your invoice base. It will want to know the invoices’ age, placing a higher value on newer invoices, since those have a higher likelihood of payback versus accounts that have been open for a while. It will also review the financial standing of the organizations that are indebted to you.
Once the factoring company has a good sense of your accounts receivable invoicing value, it will provide you with a cash advance of something close to 70 to 90 percent of the value. The company will then take on the task of collecting repayment from those companies. Once it has received payment in full, it will provide your company with the full balance of those invoices, minus its fee for collecting those debts.
Two Forms of Factoring
Factoring companies typically operate under one of two work styles: recourse and non-recourse. How these styles determine accounts receivable values, collect debts and pay clients is much the same, but there is a major difference between the two that you should know.
The biggest difference between recourse and non-recourse invoice factoring is what happens when an invoice goes unpaid. With recourse factoring, if a customer doesn’t pay an invoice, your company would buy back the invoice from the factoring company. With non-recourse factoring, the factor takes on the risk, though there are stipulations to this as well.
While accounts receivable financing and factoring can help a business struggling with cash flow problems, it is always smart to make sure you understand what you’ve agreed to in the process. A good factoring company will work closely with you to answer all your questions.
