Learn about the ‘what’, ‘how’ and the benefits of Invoice Factoring
What is Invoice Factoring?
If you think that Invoice Factoring is like taking a loan, you should take a step back and think again. Invoice Factoring is not a loan. It’s a simple process to get the financing done against your uncleared invoices. You give the factoring company all your uncleared invoices against which they give you the 70-90% of the payment. Then the financing firm chases all your clients to get clearance from them.
In a nutshell, the money that you get from the process of Invoice Factoring is the money that you have already earned. That is what makes it very different from a loan. Read on to find out more about Invoice Factoring.
How does Invoice Factoring work?
Like we mentioned before, the process of Invoice Factoring is simple. We will break it down for you step-by-step.
First of all, you hand over all your uncleared invoices to the invoice factoring company.
Then they will verify whether or not your invoices are honest-to-goodness and begin to do the processing. This step is necessary because the factoring company needs to know that your clients are genuine.
Once your invoices get verified as OK, the factoring company will pay you most of the invoiced amount, which would be between 70% to 90%.
Now, since you are free from chasing the clients for the payment, the factoring company will do the client-chasing for you.
Your clients will now have to pay the invoiced amounts to your factoring company.
Finally, after receiving the full payment from the clients, the factoring company will clear the balances with you after cutting their share of the fee according to the agreement.
Are there different ways of doing Invoice Factoring?
There are two ways of doing Invoice Factoring. One way is Spot Factoring, and the other one is Whole Ledger Factoring.
Spot Factoring : In Spot Factoring, the business owner usually sells a single invoice – one that is typical of a large amount. It is more flexible than Whole Ledger Factoring as both the business owner and the factoring company do not have to deal with more than one party. However, the downside of Spot Factoring is that the interest charge is a lot higher than that of Whole Ledger Factoring.
Whole Ledger Factoring : In Whole Ledger Factoring, the business owner sells the entire book of accounts to the factoring company. This is the reason why Whole Ledger Factoring can also be called Full Turn Factoring. Since the complete book of accounts is involved in the process, all your clients’ invoices will be included. It makes it less risky for both the business owner and the factoring company, and that is why the interest charged is less than that of Spot Factoring.
Benefits of Invoice Factoring
Invoice Factoring has a low rate of interest as compared to other business loans.
Unlike other loans, you don’t have to make any repayments, and you don’t have to worry about constantly paying the outstanding amount.
There is minimal risk involved in invoice factoring as the responsibility of chasing clients is handed over to the factoring company.
There is no need to have any back-office support as this becomes a two-time process, wherein first, you receive almost the entire amount after getting your invoices verified. Then finally, you get the remaining balance once your clients clear those invoices.
There is no need to wait for endless weeks to get your invoices cleared.
But wait, there is something called Invoice Funding too. What is that?
While Invoice Factoring is not a loan, Invoice Funding is a loan. The process is almost all similar to that of invoice factoring, except where the payment you receive from the factoring company needs to be repaid. It is like using the funds as collateral. You will be responsible for communicating with your clients and getting your invoices cleared, and once they are cleared, you will be responsible for making sure that you repay the funds that the factoring had paid to you.
It may or may not work for your business. However, it is dependent on your needs and requirements.
We can be a reliable factoring company for you because we fund your cash advance within 24 hours of your application and verification. Our interest fee is calculated according to our customer’s needs. So, if you are someone who needs to get their invoices factored, feel free to reach out to us for hassle-free services.