Factoring finance is a type of debtor finance, and if you’re unfamiliar with the idea, it may seem difficult to learn all of the complexities and specialised terms associated with this concept. This simple guide will help you understand what factoring finance is, familiarise yourself with how it works and find out how your business could benefit from it.

What is factoring as a source of finance?

Sometimes referred to as accounts receivable financing, factoring takes place when a business sells its open invoices to a third party that then collects on those debts.

How does factoring provide security for business finances and accounts receivable management?

Typically, when businesses submit an invoice to their customers, the customers have a set amount of time to settle the invoice and provide payment. In the interim, the business knows that it is owed money but that it might not receive payment for several weeks. This can inhibit the company’s cash flow, restricting their ability to pay staff or settle operating expenses and limiting their capacity to purchase new stock.

Accounts receivable financing enables the company to receive cash quickly instead of waiting for payment, helping to balance their finances and reduce the burden on the accounts receivable department.

What types of businesses use factoring companies?

Any business that administers invoices and needs more working capital might consider using a factoring company. In particular, Quickbooks noted that the following industries may be well represented in factoring:

  • Construction.
  • Logistics.
  • Manufacturing.
  • Printing.
  • Staffing.
  • Legal.

How does debt factoring improve cash flow?

Debt factoring enables business-to-business companies to tap into future infusions of cash ahead of schedule. Essentially, if a company that is low on cash is able to land a large new work order without having sufficient cash on hand — such as a job that might require them to spend a significant amount of money on supplies, labour and other operational expenses — they might have to turn down the work order or delay it until they’ve received payment for other jobs they’ve already completed. By using factoring, they can leverage outstanding invoices to get the cash they need to keep their operations running smoothly.

Do banks do factoring?

While factoring might not be a traditional bank offering, some banks will provide these services for trusted business customers. Other financial institutions may refer their clients to outside finance providers and factoring companies.

How does a factoring company buy invoices?

In order for a factoring company to make money when purchasing invoices, they will assess a factoring fee. Essentially, this is a percentage of the invoice they will take as compensation for their service once they collect payment. In addition, the factoring company may not provide the total balance of the invoice upfront, but instead, they could give you a portion immediately and then pay you the rest, minus the factoring fee, after collecting.

How does supply chain financing differ from invoice factoring?

Supply chain financing is similar to invoice factoring, except that it is usually initiated by the buyer, not the seller. Supply chain financing can be a useful tool for trade finance in international supply chains.

Is factoring considered debt?

Factoring may not be considered debt, because it is a sale of accounts receivable. However, recourse factoring resembles debt in that, if the factoring company is unable to collect from the debtor, any unpaid invoices must be bought back by the supplier.

How does factoring differ from a business loan?

Business loans require the borrowing company to pay the principal back to the lender, plus interest, over an established period of time. It is a form of debt that often must be secured by collateral. If the borrower cannot repay the loan, the lender may be entitled to collect the collateral.

In the case of recourse factoring, the supplier must buy back unpaid invoices for which the factoring company is unable to collect payment. However, the supplier then owns the invoice again.

What is invoice financing versus factoring?

Invoice financing is similar to factoring but different in some key ways. Though it may serve as an umbrella term for using invoices to secure financing, invoice financing may refer specifically to invoice discounting, which is certainly distinct from factoring.

How are invoice factoring and invoice financing different?

When used as a synonym for invoice discounting, invoice financing refers to an arrangement in which the supplier is still responsible for collecting payment from their customers. It is similar to factoring in that the supplier still receives money from the finance provider upfront, improving their cash flow. However, invoice discounting is similar to a loan. The supplier interacts with the customer, collects payment and eventually repays the financial partner.

The Unlock Payment Gateway can help buyers initiate financial agreements with their suppliers in a way that extends their invoice payment terms. This can help buyers and their suppliers improve cash flow and purchasing power in exchange for low monthly merchant fees. Learn more by visiting UnLock online, by writing to us at assistance@unlockb2b.com or by calling us at 1300 257 387.