![]() The invoice factoring process diagram used in this article is available for download in PDF format by following the link below This process is summarized in the diagram below: The remaining balance on the invoice (1,200) less fees at 2% of 8,000 (160) is paid by the factoring company to the business (1,040).Invoice factoring company collects 8,000 from the customer.Factoring company advances 85% (6,800) to the business.Invoice sold to factoring company at a discount.The invoice factoring company would then collect the full outstanding amount from the customer, and pay the business the remaining balance of the invoice value less any fees it charges.įor example, if the invoice value was 8,000, the advance percentage 85% and the fee 2% for 60 days, the invoice factoring arrangement would proceed as follows: ![]() However, if the business uses invoice factoring, it would immediately sell the invoice to the factoring company for a fee and receive in return an initial advance of between 65% and 85% of the invoice value allowing it to fund its costs. In the meantime, it has had to pay for labor and materials used in the manufacture of the product, and has to find this finance either from supplier credit, equity, or additional borrowings. Factoring company pays the business the balance of the accounts receivable less fees.Īs an example, suppose your business has manufactured a product and has made a sale to a customer on 60 day credit terms, which normally means that the business would have to wait 60 days before receiving payment.Factoring company collects the accounts receivable from the customer.Factoring company provides the business with a cash advance.Accounts receivable are sold to the invoice factoring company.Business sells to customers on credit and generate invoices and accounts receivable.Typically the invoice factoring process involves the following steps: The factoring company charges the business a fee usually based on the value of the invoices factored, the risks involved, and the level of cash advances made until the factoring company has collected the cash from the customer. The invoice factoring company is then responsible for collecting the accounts receivable. Invoice factoring effectively means that the business sells its outstanding customer invoices to a factoring company in return for cash. The advantage of factoring accounts receivables is that as the business grows, the accounts receivables grows, and therefore the availability of short term finance grows with the business, avoiding among other things the risk of overtrading. Invoice factoring is one method used to try and solve this problem by allowing businesses to raise short term finance by selling its accounts receivables (outstanding customer invoices) to a factoring company. This delay or funding gap due to the credit period given to customers, can cause significant cash flow issues particularly when a business is expanding, and the amount of credit given increases. The problem with this is that there is a delay between incurring costs (labor, materials etc.) to manufacture the product, and receiving the cash from customers to pay for those costs. If your business sells to customers on credit, you will generate invoices and have accounts receivable representing amounts due from your customers.
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