How does invoice finance work?As a small business owner you may have heard the following terms when it comes to invoice financing:
- factoring
- Invoice discounting
- Invoice funding
- Invoice purchasing
- Invoice Funding
The basics of a invoice finance transaction involves three parties.
- A business that sells goods or services to another company on open account like 30 day terms.
- The company that buys the goods or services from #1.
- An Invoice finance, or factoring company.
Invoice finance has many subtleties so it is probably best to use a simple example.
Party number one, lets use the name Widget Wholesaler, has an invoice for $10,00 due from Party number 2, lets use the name ACME retailer, that will be due in 30 days. The work is completed and Widget has done business with ACME for years and knows they always pay their bills. The problem is Widget is growing quickly and needs to make payroll this week.
Widget hears about invoice financing from a friend and does a google search for invoice factoring companies. Fast A/R Funding comes up on the search and Widget contacts an account executive for an explanation of invoice financing.
The account executive at Fast A/R Funding explains that invoice financing or factoring is a financial tool that has been used for centuries by companies around the world. In this situation it would involve the selling of Widget's receivable due from ACME to Fast A/R Funding today in exchange for a discounted amount of the invoices value. Fast A/R Funding would own the payment rights from ACME and Widget would now have cash to operate its business. ACME would be required to pay Fast A/R Funding because Fast A/R Funding is now the owner of the receivable. When Fast A/R Funding receives payment from ACME it uses the funds to repay itself whatever amount it advances Widget, subtracts its fee and forwards Widget the remaining balance. That is the basics of factoring. The sale of an invoice to a factor for a discounted value of the invoice today.
This is only a very superficial summary, but for a beginner it is a good place to start.
If you have any question about invoice finance please feel free to click on our more info button below or give us a call.
Our firm is a little different is that we have built a fully integrated electronic platform that allows companies to finance invoices with us over the internet.
