Factoring is a transaction where a business is selling its invoices to an invoice factoring company to gain access to the cash tied up in outstanding accounts receivables. The receivables are removed from your books and are added to the factoring company‚Äôs balance sheet at their fair value.
The factoring company would be purchasing these accounts receivable at a discount and then waiting on your customers to pay the invoice, whether that be 30, 60 or 90 days later.
The discount amount depends on a number of different things, such as the dollar amounts of the invoices you are selling, how long it takes for your clients to pay, how credit worthy your customers are and which factoring company you choose. This rate can vary from under 1% of the invoice value too 3 or 4%.
Note: All advance rates and discount rates or fees are agreed upon while being set up.
Step 1: The seller submits their invoices to the factoring company to receive 80% to 95% of the amount of the factored invoices the same or next day. For example, if you sell $500,000 worth of accounts receivables and get a 90% advance, you will receive $450,000.
Step 2: The invoice factoring company holds the remaining 10% or $50,000 as security until the payment of the invoice or invoices has been received.
Step 3:The factoring company collects payment over the next 30 to 90 day period depending on your clients payment terms.
Step 4: Once the payment has been received, the factor pays you, (the seller of the invoices), the remaining 10% less the factoring fee, which typically runs 1% to 3% of the total invoice value.
The reason why so many companies utilize a finance facility like this is the following:
There are many different terms that are used in factoring, Meritus Capital wants you to understand what they all mean so you can make an informed decision for your business. Here are some of the most common terms used and articles & videos that can help you understand them better.
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