Everything You Need to Know About Invoice Factoring

Factoring arrangements can cover a broad range of anticipated goods, from the sale of commodities in the future to your purchase orders and account invoices. If you’re looking for an asset financing option with very little risk to you and predictable cost structures, it has a lot to offer. Invoice financing, as one type of this product, is very flexible and useful to a variety of industries. If your business has a model that involves 30, 60, or 90-day invoicing schedules, then this option is designed with you in mind.


When you finance your invoices with an arrangement like this, the customer’s likely repayment window and risk of default dictate the size of your available cash advance and the costs of the service. This means that the longer your financing company is going to be waiting for your customers to pay them, the higher the fees get. There are also usually penalty clauses for customers who go beyond the estimated payment window, and you need to be prepared in case these costs arise, because they do from time to time. It can take several rounds of financing to fine tune which customers you finance and what their average rate of successful on-time payment looks like, so you should plan to spend some time working out projections for factoring costs if you finance with this product regularly.


While there can be high costs to a customer paying late, this comes with a benefit that makes the cost well worth it for most companies. What is it? Payment insurance on your customers. If you choose the right invoice financing arrangement and you’re careful about reviewing terms, it is possible to find a no recourse option. This means that if your customer defaults, they are pursued for the debt. While it’s not a commonly needed feature of the product, it is a nice one to have, because when it’s necessary, you’ll be happy to have it.


Integrating invoice factoring into your cash flow management plan is a great way to ensure you have a steady management of your cash reserves and contractor payouts. Once you’ve built the costs into your quotes and financial projections, it is not only accessible and useful, it’s also a very stable financial tool. The best part is that you can use it exactly as needed. If your cash flow is smooth, defer financing invoices for a while, and then pick it right back up when you have individual orders you need cash out of. It makes your account management easy.


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