Invoice Factoring is the new way of financing method that most companies use in order to obtain a new source of funds to support their companies’ operations or projects.
The main concept of Invoice Factoring is that the company have many amounts of account receivable on hand and this will be payback by its customers.
Yet, waiting for customers to pay back the account receivable is quite a waste of time and money through interest. The payment is also not in the big amount at one time that the company could use to fund its big operation or project.
Therefore, the concept of Invoice Factoring has come and the company could sell all of its account receivables and getting a large number of funds at one time.
This is really important for cash flow management as well as operational control. It is the new way of cash flow management.
How does it work?
The process of Invoice Factoring is that the company could offer to or receiving an offer from the factoring companies to sell all or part of the invoices. These invoices refer to accounts receivable.
In most of the cash, the company receives the part amount of account receivable that it sells. For example, 90% of receivables in advance.
This amount is normally quite big and it could use these fund to support large projects or investments.
The factoring company will charge the administration fee and sometimes interest from the company. Sometimes, it has been said that Invoice Factoring has potential hidden fees.
However, sometimes it is difficult to meet the requirement of a factoring company if your company has a small amount of receivable outstanding as well as receivable in every month. They require a certain amount of AR.
Another problem with Invoice Factoring is that our customers will be up sad with our company because the debt is collected by the new agency.
In most of the case, those agencies could make the relationship between customers and company as the result of a misunderstanding.