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What is invoice factoring and how does it work?

Updated: Jul 22, 2022

One kind of accounts receivable finance is called Invoice Factoring. It helps those businesses who tend to experience longer payment terms with invoices by working capital. Invoice factoring is also sometimes called Debt Factoring which means that the financial product enables the business to sell unpaid invoices to a factoring company.


Factoring is also a type of alternative finance that is being popular nowadays even if it is more challenging for businesses with imperfect credit to use traditional finance products from banks.


The company should also use factoring to speed up access to funds and incoming cash flow, as receiving payment for invoices can sometimes be a lengthy process. It is also to attain much-needed working capital where invoices are taking long periods of time to get paid.


How Does Invoice Factoring Work?


After being established, the factoring company will purchase the unpaid invoices for a percentage of their value and then take over the debt collection process. The remaining amount owed to your business for the invoices will then be repaid once the factoring company has collected the total value of the invoices from the customers.



Advantage and Disadvantage of Invoice Factoring


ADVANTAGES


- Quick, safe source of cash flow by financing accounts receivable and releasing working capital tied up in unpaid invoices.


- Contract with your sales ledger and factoring amounts can easily expand.


- Factoring is less expensive than turning to equity investors.


DISADVANTAGES


- this type of finance works best for businesses with a high-profit margin that can absorb the costs because the costs are higher than a bank loan.


- Can also reduce the scope for additional borrowing.


- It could affect customer relationships.



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