What is Invoice Factoring? How does it Work?

Invoice factoring is a general term used for asset based lending products which allow companies to finance slow-paying accounts receivable. There are two ways to finance invoices. The one is through a sale. Invoices can be sold to a factoring company in exchange for an immediate payment. And another is using receivables to secure a revolving line of credit through an asset based loan.

Although both solutions provide similar results, both methods of financing are very different.

Here we will discuss

  • What is invoice factoring?
  • How does invoice funding work?
  • What is an asset based loan?
  • How an accounts receivable asset does work?

What is invoice factoring?

Invoice factoring is a form of invoice financing that allows companies to sell their accounts receivable to improve their working capital. This financing provides the business with immediate funds which can be used to pay for company expenses. Instead of waiting for 30-60 or 90 days to payment come from the client you can encase your invoice within 24 hours at Invoice Funding.

Invoice factoring is easier than conventional financing because you are technically selling an asset rather than getting a business loan. The most important requirement to qualify is to have invoices from creditworthy commercial clients. As a result, factoring is available to small businesses that don’t have substantial assets or a long credit history.

How does factoring work?

Most of the invoice factoring transactions are structured so that your company sells its invoices in two installment payments. The first installments covers about 80 percent of the value of your invoices and is deposited to your account within 24 hours of requesting the funds. Your company gets the remaining 20 percent less the finance fee, once the customer pays the invoice in full, you will get the rest of the amount of that 20 percent.

Your invoices will be verified before funding. Verification allows the factor to determine that the invoices are due and that there are no issues that could prevent its payment (e.g., disputes, charge backs, etc.). Factoring lines are generally based on your sales. Therefore, lines can increase as your sales to creditworthy commercial clients grow.

What is an asset based loan?

The asset based loan is a form of funding which allow you to finance most of your company’s asset, such as invoices, inventory, and machinery. It is a form of invoice financing for companies that decide to finance their accounts receivable. An asset based loan is considered an intermediate product between factoring and a bank line of credit.

However, asset based loans differ from factoring in how they operate. They can combine the features of a line of credit or a term loan, depending on which assets are being financed. Asset based loans are available to small and medium sized enterprises that need a minimum of £80000.

How an Accounts Receivable Asset Does Work?

If the line is used to finance invoices, it works more like a conventional line of credit. This strategy allows your company to draw funds as you invoice clients and pay the line down as customers pay their invoices. On average, lines allow you to borrow up to 80-90% of the value of your eligible receivables.

Looking for financing?

We are a leading funding broker within UK. For a factoring or asset based loan quote, fill out our online enquiry form and we will contact you and provide you the best quotation that suits to your business.

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