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What is Invoice Financing / Factoring and How does it work?
Invoice Financing or Factoring is a financial solution that allows a small business company (e.g. Small and Medium Sized Enterprises or SME) to sell its receivables (in the form of invoices) to a financial institution like IFS Capital. For example, the small business can be in the business of selling kitchen supplies like cooking oil and bottles of ketchup to a company that owns a few restaurants (i.e. customer of the small business). While it is possible this customer may pay immediately upon receiving the supplies from the small business, it is more likely in normal business practice for the customer to pay some time later. The typical time period can vary for different companies and industries but let us say that it is 3 months from the invoice date.
So, in our example if the small business does not receive the monies from the sale of its supplies, but only 3 months later, it may have a problem. For instance, there will be payments that the small business will need to make in the meantime; like salaries of its workers, rental expenses and purchases of its goods from other suppliers. The good thing is that it has issued invoices to its customer based on the successful sales of the supplies. As a result, an asset, or more specifically, a receivable (as represented by the issued invoices) has been created in its books. This asset or receivable has a value or monetary value to it because there are funds that are yet to be received from the customer.
So how can the underlying values/monies in the invoices or receivables be unlocked earlier? The answer is Invoice Financing or Factoring of course. By selling the invoices or receivables to IFS Capital, the unpaid funds can be advanced earlier to the small business. The amount advanced is at a proportion of the face value of the invoices. For example, if the sales amount invoiced is $1,000, an advance ratio of 80% mean that the monies advanced to the small business is $800. The charges for Invoice Financing or Factoring include interest (based on the amount advanced) as well as a commission fee for each invoice processed. When the customer pays the invoice later, the amount received is nett off against the advanced amount plus fees and interest. Any excess monies can be returned to the small business or nett off against future advances.
Benefits of Invoice Financing / Factoring
Therefore, Invoice Financing or Factoring allows your small business company to get your funds quickly from your outstanding invoices which may otherwise generally take 3 months (or more!) to receive from your customers. With account receivables management and credit control services, you can also access your statements 24X7 through our online platform. You will spend less time on financial administration paperwork and more time on growing your business, where it really matters.