Factoring Invoice: Win-Win Alternative

Invoice Factoring presents a creative option for businesses to liquidate any outstanding accounts receivable invoice by selling these invoices at a discount to a specialized financial organization. It is a business operation that must be clearly differentiated from a bank loan.

First difference between invoice factoring and a bank loan is that invoice factoring is not a loan. It is actually a procurement or acquisition of an asset, particularly, receivables.

The second difference is that the seller's financial credibility is not the primary focus in invoice factoring. The actual value of the receivables for sale is the more important element.

The third difference is regarding the number of involved parties in the transaction. Unlike bank loans where there are only two parties involved, invoice factoring entails three. First is the seller of the receivables, to whom the second party owes the money. Second is the debtor. Third is the financial institution referred to as the to whom the receivables are being sold to at a discount. In this relationship, the debtor settles all dues directly to the factor instead of the original seller.

Because receivables are sold at a discount of about 2.5% to 7% off the original value of the receivable, it makes one wonder why a business would opt for this method of raising extra and instant cash. The answer is simple. The business, after careful thought and calculated projections, realize that the income to be generated using the proceeds of the sale will be of much higher value than that of the receivable amount. By cashing in the receivables before the 30, 60 or 90-day terms with the debtors, the business is able to utilize the money for immediate investment in more profit-generating endeavors.

Let's take a look at other reasons for business managers to opt for invoice financing.

- Sellers are rid of the risk of non-payers. The factor takes over the gamble of a debtor's probability of settlement.
- Sellers are freed from incidental costs incurred in the handling of invoices like posting, depositing of checks, entering payments and maintaining status reports.
- Sellers reap the same benefits from invoice factoring as that gained from operational sales. It directly contributes to available operating capital that may be used to grow the business.
- Sellers are enabled to avail of early payment or volume discounts with their suppliers due to availability of cash.
- Sellers can save on early payment discounts since cash will be immediately remitted by the factor
- Sellers retain full control of the company without having to pay back any money in the future
- Sellers do not incur debt since invoice factoring is not a loan

In sum, invoice factoring presents a win-win situation for all parties involved. The seller maintains a good level of cash flow and is able to focus on daily operations, the debtors receive their goods and services in a timely manner, and the factor receives the payments from debtors along with the transaction fees. Simple, isn't it?