About Invoice Factoring
Factoring is a service otherwise known as accounts receivable financing, accounts receivable funding, or cash flow financing. Factoring is the process of outsourcing receivables to a factor in exchange for immediate funding. In many industries, payment terms can range from 30-90 days. Growing companies require a quicker flow of cash in order to facilitate their success. Factoring has proven to be one of the most effective tools for maintaining the cash flow of companies in many different industries.
Factoring is the right financial solution for those who need improved cash flow. Unlike conventional lending arrangements, a factoring facility is based on the credit strength of a company’s payers. Thus for companies who have been declined by banking institutions and for new businesses without established credit, Factoring can prove to be a crucial key to growth.
Factoring provides clients with immediate capital upon the creation of an invoice. By selling receivables to a factor, companies can concentrate on building client relationships and pursuing new business opportunities while resting assured that their accounts are being properly maintained.
Terms and Definitions
- Face Value
The value as stated on the front page of an invoice.
AdvanceA factoring facility provides financing up to 95% of the face value of an invoice. For example, if an invoice is worth $100, and the facility has determined a 90% advance is in order, the client shall receive $90 from the factor upon selling the receivable.
EscrowUpon receipt of the 90% advance, the remaining 10% shall remain in escrow pending payment of the account receivable. This balance shall remain untouched until such time.
FeeThe fee charged for a specific facility depends on several key factors including, without limitation, industry, payer credit, level of security, A/R turnover, etc. The fee structure is individualized for maximum customer benefit. This fee is deducted from the funds held in escrow once the invoice has been paid.
ReserveOnce a receivable has been paid and the fee has been deducted from escrow, the remaining balance is placed into a rebate account called a Reserve. The reserve shall be released to the client upon request.