What exactly are factoring and invoicing financing? Many people confuse the two in a slightly misguided belief that they are in fact the same business method. However, they are not. Factoring at its most basic is the short sale of accounts receivable at a slight discount to an institution that wishes to purchase said accounts in an effort to make money on their investment. Invoice financing is a short term loan based on using the account receivable as collateral.
Factoring allows for the quick acceptance of cash on an outstanding account receivable. This means that the business owner has been paid much sooner for a transaction that may have required weeks, to a few months, to complete normally. They take a slight payment hit in the form of the discount granted to the purchaser, but they have immediate cash to continue their business concerns. This is an exceptional aide to any business, but is extremely useful for small to moderate size businesses and new start-ups.
With invoice financing a loan equal to a portion of the account receivable is generated and granted to the business owner. Generally the loaner, as well as companies that purchase discounted accounts receivable, do not care about the credit rating of the company that is acquiring the loan. They will instead focus on the company or entity that owes money to that company. This is due to the fact that it isn’t the business that is requesting the loan that is in credit based doubt. The doubt will lie with the one that owes that business money. Since the collateral for the loan is the money owed to the business this is the primary concern credit wise for the lender.
There are companies in existence that focus on this aspect of business as their primary enterprise. They specialise in acquiring new accounts receivable at a discount or with lucrative lending practices and have become a vital force for the small to moderately sized business. Even larger more established companies utilise these services regularly in the current market.
With invoice finance or factoring service on tap, any business with reasonable sales and a client base that is known to actually pay money owed can maintain a steady cash flow. Instead of running short mind month like so many smaller businesses tend to do, a business with factoring contacts can maintain a steady flow of currency and continue to grow in a steady and relatively safe manner.
There are two items to be concerned about in this type of business transaction both of which revolve around payment actually being rendered by the account that owes money to the business. If a business sells an account receivable at a discount, but the money is never sent or is somehow lost in translation the business owner will be liable for refunding the money to the purchaser. Similarly with an invoice financing contract, the company that acquired the loan will continue to be liable for money owed in accordance with that loan, and all its accompanying interest whether the account receivable is paid or not.