Understanding Invoice Factoring and Receivables Financing

If you use invoice-based accounting, factoring and financing your accounts can be a very efficient way to preserve your cash flow, cut losses from non-paying accounts, and organize your invoicing. Depending on your needs, there are a variety of different options in this arena, but you need to find a partner whose policies match your needs. There are a lot of different options for financing based on your invoices, and using the right one at the right time is the key to maximizing your profits. Whether you factor or finance this time, keep the other option in mind.

How Are They Different?

When you finance your receivables, you are getting an advance against incoming money. Typically, there is some form of recourse if your client does not pay, or at least a penalty fee applied when the balance is eventually collected, however long that is. Financing companies are also more likely to require you to finance all your outstanding receivables at once, to spread the risk around. They take over collecting payment, though, so you simply receive the balance after their fees and the advance have been deducted. Factoring, by contrast, involves outright selling the invoice as a debt, so the factor has no recourse to you and must collect on the payment to make money. These agreements typically allow you to sell individual invoices or select groups, but not always, so check the fine print. They also offer less cash than financing, because they are seen as riskier endeavors.

When To Use a Factor

If you have no idea how long a customer will take to pay or even if they can pay, it’s a good idea to consider factoring as an option. If you’re going to finance receivables to get some income and you’re worried a few invoices will not pay on time, you can even factor those first, making it so that when you apply for financing, you’re only holding the invoices you count on to payout. By balancing which option you’re using as appropriate to the customer’s likelihood of paying in a reasonable window of time, you can get the most out of your money. Make sure you shop around for quotes, too, because the size of penalty fees and the window of time you have until they kick in can vary a lot from factor to factor, and often the price structures are designed with trade-offs that you can use to your advantage if you shop around for the right deal.

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