Invoice factoring is a great way for a business to produce working capital, especially if they won't qualify for a bank line of credit. Although there is less paperwork and an account is easier to set up than conventional financing, factors are very vehement about examining the truthfulness of invoices.
In a typical accounts receivable factoring relationship, the only security required is a consignment of the company's receivables. These are amounts repayable from customers on goods sold or services fulfilled. Depending on individual factors, such as the identity of industry the client participates in, the credit-worthiness of its patrons, and the reliability of the company's billing and collections procedure, the advance percentage on invoices given in to the factoring company can range from 65% to 85%.
The remaining amount is regarded as the reserve and offers a cushion to the factor. Why factoring companies prove invoices? Since the factoring provider's collateral is directly tied to the amounts billed on credit, they will frequently contact the customers directly to test the invoices. They will not only corroborate the invoice totals, but equally as important, make sure the client is cmnfortable both in terms of completeness and quality.
Many businesses request factoring for a product or service that has yet to be given in order to prop up their cash flow. Even though they have invoiced the customer, the work won't be done until later and the client needs to bolster their cash flow. A company with this scenario isn't a candidate for factoring because the customer can demand their money back if the service isn't performed. This is considered pre-billing. Another situation that doesn't fall into the model of factoring is progress claims.
This usually relates to a construction project in which the entity bills the customer on a periodic basis until the project is completed. Because there is no milestone of finalisation, the factoring company is unable to advance funds on the invoice. To do so would vastly magnify the risk to the factor. Another difficulty is related to the warranty directly matched to the sale.
If the client is not satisfied with the goods or services sold, performance is called into question and there could be offsets against the invoice. In other words, not only do factoring businesses require the work to be completed, they also seek to examine the satisfaction of the customer. Ongoing issues of this nature will likely result in a termination of funding.
Factoring can massively improve the cash flow of an organization, but company proprietors and decision makers must understand the position of the factoring business they are working with. There will not likely be a issue if the goods or services sold are of satisfactory quality and credit is extended prudentially.