Factoring:

Also Known As:

Invoice Factoring, Invoice Financing, Accounts Receivable Financing, Receivables Financing

Defintion:

Factoring is when a company sells and assigns an invoice in exchange for an advance to a third party (factoring company).

Who Can This Benefit?

Invoice Factoring can best assist companies that provide goods and services in the B2B space on credit. Terms of credit usually are 30-120 days, however funds are needed sooner to fund the company’s operational activities.

See How It Works

Problem

ABC Widgets is a small operation of less than 10 people. They have an excellent product and many happy customers. They would prefer to receive funds within 15 days however, their competitors offer atleast 30 day credit terms. They have offered this in order to keep in line with the industry standard, but they are struggling. They now have to wait 30 days in order to repurchase more material to continue building more widgets.

Many orders are coming in, but because they don’t have the funds available to fabricate the widgets their turn around times on orders is very slow. The date of delivery provided to their customers frustrates their clients, and they have lost significant business due to this. This situation causes a lot of stress on management, as most customers want to pay on credit, but ABC Widgets cannot afford to wait that long. They start providing discounts to customers who pay within 10 days, but this doesn’t seem to help.¬†On top of their overhead, they have payroll and materials to purchase, but they can’t seem to get a head if they don’t have a timely flow of cash in their business.

Solution:

Factoring to the rescue! ABC Widgets has several outstanding invoices that they assign to a factoring company. Once all the Notice of Assignments are sent, accepted and returned, ABC Widgets receive a well needed injection of funds. This dramatically gives a boost to production and the overall morale of the company, allowing management to breathe a sigh of relief. Now, as soon as the work is completed and delivered, ABC Widgets sends the invoice to their factoring company with all the paperwork and funds get deposited into their bank account the same day! Accounting can now work with this daily inflow of cash to distribute to all the required areas.

Impact:

By being able to receive a daily or weekly injection of cash, right when the work is completed, ABC Widgets can focus more on increasing their output, and growing their business. By outsourcing their collections activities it has freed up a significant amount of time for their accounting personnel to not have to be chasing behind customers for payments. By partnering with a factoring company, ABC Widgets has been able to provide better terms of sale, from 30 days to 60 days to it’s customers. This has increased business by 15% over the last quarter and has made them more competitive in their industry. Profits are set to show their best ever year on record.  
Factoring Cycle
Each individual factor may have their own way of conducting business, however this is the general model.