When it comes to collecting on invoices when dealing with B2B business, it can be very frustrating when you have done the work for companies that demand the best terms, but then are slow to pay, or it is a real process even to get them to pay.
A solution to the dilemma is to turn your slower paying invoices into a cash flow stream by factoring invoices with a firm that will then go after the invoices themselves, after giving you a discounted amount of the bill.
Yes, you will be receiving a lesser amount of money than your normal charge for your services, but at least you will be receiving your money on a more timely basis. Not having the cash on a timely basis could be a hindrance when it comes to expansion of facilities, taking advantage of opportunities in advertising, marketing, and the hiring of new employees, and covering payroll.
Thus, in the factoring process, there are three parties that are involved, the issuer of the invoice, the company who the invoice is sent to, and the factoring company who will advance the money to the billing company, and then collect from the company who was billed.
The amount of the factored money is usually in the 70 to 90 percent range of the original invoice. Once the invoice is paid by the company owing the money, a rebate is given to the invoicing company, less a fee for the service.
The benefits of working with a factoring company include the speed at which the process works as compared to working with a bank. The factoring company is set up to working at a high turn-around level, whereas a bank may take longer to get a loan approved on a event-by-event basis. Plus the factoring company will go after the owed amount, perhaps more aggressively than the company issuing the invoice. There are very high approval rates when using a factor, and if a company is having any credit issues, the factoring method will be a superior way to handle this.
However, if the bank allows the business a line of credit for this very purpose, the bank could hold an advantage, as the entire invoice amount could be advanced, and then the bank reimbursed when the invoice is paid. Plus the bank financing rates will be much less than the rates that are applied in a factoring process.
Another drawback to factoring is that the factoring company will notify the customer that their invoices are being factored, and that could interfere somewhat with the customer relationship that currently exists. Some factoring companies will work on a non-notification basis, which should be utilized if this is a problem.
Factoring invoices are very widely used, however, and with good results. Factoring is a very common practice in IT, wholesale and manufacturing, as it takes the burden off of the factoring company and allows a simple method of continuance of cash flow on a regular basis, which helps greatly with overall planning.