Invoice Factoring is a transaction that helps with debt financing in which a business will sell its accounts receivables/invoices to a lender at a discounted rate. Businesses will factor their receivable assets to meet current demands for immediate cash. Accounts receivable financing is also known as receivable factoring and invoice factoring. Asset-based lending uses your company’s accounts receivable for collateral to secure the loan.
Invoice Factoring vs Bank Loan
Invoice factoring and bank loans are different in that the accounts receivables are sold rather than offered as collateral. This allows your company to convert receivables into operating cash so you do not have to wait for 30, 60, 90 days or longer for your customer to pay.
Your business receives the cash needed to continue operating in a quick manner. The cash injection will allow you to pay employees, overhead expenses, and manufacture more goods.
Invoice factoring is a great option for a business that needs money fast who cannot secure a bank loan. Factoring loans are known by several different names. Invoice discounting, debtor financing, receivables factoring, and invoice factoring.
A lender or broker will look at your credit history and well as customers prior purchasing invoices. Lenders want to be confident that they will receive the money from your customer before lending the capital to your business.
Companies can use factoring as a way to infuse cash into their business without taking on additional debt. Selling their accounts receivables at a discounted rate, they will receive the money without having to wait to collect it directly from the customer.