So you are considering Invoice Factoring for your company and you have never done it before; what should you expect?
For the sake of clarification, Invoice Factoring is a term which was originally used to describe when a company actually sold their receivables to a finance company at a discounted rate and the purchaser of those receivables was responsible to collect and there was no recourse to the seller. While this type of scenario still exists today, it is not very popular as the cost associated with this type of arrangement is considerably higher than Accounts Receivable Financing, which is now considered to be Accounts Receivable Factoring.
Today’s Invoice Factoring typically is not a non-recourse practice whereby if there are invoices which are not collected within the prescribed terms of financing of the funder, the invoice is to be replaced or charged-back to the company that issued the invoice in the first place.
This puts the responsibility on the company wishing to use Invoice Factoring to ensure that they deal with creditworthy customers as the question of accountability ultimately lies with them.
What generally happens is when your company issues an invoice to a customer; the finance company will require a copy of the Invoice issued along with a copy of the Proof of Delivery so that they can confirm that the goods have been satisfactorily delivered as stated on the Invoice and that the customer intends to pay that Invoice so that the finance company will have done their due diligence prior to issuing the advance.
The advance rate does vary from company to company and is also dependent on the credit of the companies involved (company seeking to use Invoice Factoring and the company the invoice is issued to) but the average advance rates are 70% to 90% of the Invoice face value.
This means that if you issue an invoice for $1000 and the advance rate is 80% you would receive an initial advance of $1000 x 80% = $800. Assuming the advance rate is 2% per 30 days and the customer pays the invoice under 30 days the company using the Invoice Factoring facility, would receive the balance ($1000 – $800 = $200) less the finance fee which would be calculated as $1000 x 2% = $20 so the final amount paid out would be $200 – $20 = $180. This would mean that for the advance of $800 on the invoice of $1000 would cost the company $20. If the invoice was pay after the 30 day mark but before 60 days, the finance fee would be $40 for the $800 advance.
Most finance companies require all invoices to be paid before 90 days and if the invoice was not paid by that point the company would either have to replace the invoice with another invoice or the company would be responsible to repay the $800 plus pay the finance fee for the time the funds have been outstanding.
All in all, Invoice Factoring is not overly costly and will allow your company to get the funds which are due to your company more quickly to help out to cover your working capital needs.