Invoice factoring might be a term you have come across during your time working as a freelancer or if you own a small business. Invoice factoring is a financial option which is given to both businesses and government agencies and it talk about how invoices are paid. It provides a short term capital which is given in exchange for both assigning and relying invoices to a factor. The factor will advance the company 80% of the value of the invoice, and then once the invoice has been paid, the factor pays back the remaining 20% minus administrative fees.
There are a few types of factoring invoice such as a government factoring invoice and small business factoring invoice. Invoice factoring is similar to invoice financing, however it is much more simple.
Invoice factoring involves a few different steps…
1.Invoice Your Customer
First of all you will need to invoice your customer as your normally would for the products or services which you have provided to them.
2.Sell & Assign the Invoice
The best step is where you will choose a factor to work with and then you will sell and assign the invoice to them. During the all,ovation process you will essentially sell them all of your outstanding invoices and be paid by the factor.
The factor will take a look at your eligibility and they will also contact your customers credit records to make sure that they will pay back the invoice amount. You and the factor will then sign an agreement and they will lend you money.
3.The Factor Pays You an Advance
The advance rate which your factor will pay you is usually around the 80% mark, and is paid before any of the invoices are paid by the customer. Once the advance has been paid they will send out a notice of agreement to all of the customers you have chosen to factor, as well as an agreement to you. This notice will essentially tell the customer that from now on when they are paying you, the invoice is going through them first. It simply started where the customers need to send the money from now on.
4.Your Client Pays the Factor
Once the invoice has been sent out to your client, they will have to pay the full amount within 90 days, as stated in your invoice.
5.The Factor Pays The Remaining Balance (Minus Fees)
Once the factor has received the full payment from your client, they will send you the remaining balance, minus a few charges for the service.
This is a useful service if you are having a tough few months in the business and need the money earlier than you would receive it when you wait for your customers to pay of their invoices, by doing this you will get 80% of the money right away and you can use this is whatever way you need to in the business, taking the stress off you financially.