Invoice factoring, also called accounts receivable factoring, is a great way to help manage cash flow by providing an alternative to traditional bank financing.

Factoring is the process whereby a company sells its accounts receivable to a factor at a discount and receives cash. The factor also typically provides credit management and collection services. For example, a company has $10,000 of sales invoices to factor. The factor advances to the company a certain percentage of the invoice upfront. For this example, let's use 75% so that at the time of purchase $7,500 is sent/advanced to the Company (if you are quoted advances of 90% or greater, make sure that you read the fine print in your contract - there's always a "catch"). This upfront payment is not a loan, but an advance on the purchase of accounts receivable. The factor then collects the invoices and sends the balance of $2,500 less its fees when the invoices are paid. Fees are typically based on how long it takes to collect each invoice.

Benefits

Factoring provides quick liquidity to your business for growth or on-going operations. As a source of funds, factoring is easier than going to a bank for a commercial loan. A bank has many financial requirements that most small businesses do not meet, typically requires a 60-day application and approval process, and provides a limited line of credit. With your cooperation, a factoring arrangement can be reached in days and the amount you can factor is unlimited, based on the credit worthiness of your accounts receivable.