Invoice factoring is a type of financing in which a business sells its accounts receivable (invoices) to a third-party company, known as a factor, at a discount in exchange for immediate cash. Essentially, the business is getting a loan from the factor based on the value of its unpaid invoices.
The factor will typically advance the business a percentage of the invoice amount, typically around 70-90%, and then collect the full amount of the invoice from the customer. Once the invoice is paid in full, the factor will deduct its fees and then remit the remaining funds to the business.
Benefits of Invoice Factoring
Improves Cash Flow
Invoice factoring can improve a business’s cash flow by providing immediate access to working capital. According to a study by the Commercial Finance Association, businesses that used invoice factoring saw an average increase in cash flow of 13%.
According to a survey by the International Factoring Association, 83% of businesses reported an increase in revenue after using invoice factoring.
Reduces Bad Debt
Invoice factoring companies perform credit checks on customers, which can help businesses reduce their bad debt. According to a study by the Federal Reserve Bank of New York, businesses that used invoice factoring saw a reduction in their bad debt by an average of 15%.
By outsourcing collections to a third party, businesses can save time and resources. According to a survey by the International Factoring Association, businesses that used invoice factoring saved an average of 17 hours per week on collections.
Provides Access to Capital
According to a study by the Commercial Finance Association, 90% of businesses that used invoice factoring said that it was easier to access capital than through traditional lenders.
Overall, invoice factoring can provide significant benefits to businesses, including improved cash flow, increased revenue, reduced bad debt, time savings, and access to capital. These benefits can help businesses grow and thrive in a competitive marketplace.