Invoice factoring is a financial arrangement where a business sells its accounts receivable (unpaid invoices) to a third-party financial company, known as a factor, at a discount. In this arrangement, the business receives immediate cash for its invoices, helping to improve cash flow and provide funds for operational needs. The factor, in turn, assumes responsibility for collecting payments from the customers who owe the invoices.

1. Issuing Invoices: A business provides goods or services to its customers and issues invoices with payment terms.

2. Invoice Submission: The business sells these invoices to an invoice factoring company (the factor).

3. Funding Advance: The factor provides an immediate advance, typically covering 70-90% of the

total value of the invoices. This allows the business to access cash quickly.

4. Credit Control Transfer: The factor takes over the responsibility of collecting payments from the customers. This includes managing credit control, sending payment reminders, and following up on overdue invoices.

5. Repayment: Once the customers pay the invoices, the factor deducts its fees and any charges, and then releases the remaining balance to the business.

Invoice factoring is often used by businesses facing cash flow challenges due to slow-paying customers or the need for immediate working capital. It allows them to convert their receivables into cash without waiting for the payment terms to be met.

There are two main types of invoice factoring:

1. Recourse Factoring: In this type, the business remains responsible for repurchasing any invoices that the factor is unable to collect payment on. This type of factoring generally has lower fees.

2. Non-Recourse Factoring: In non-recourse factoring, the factor assumes the risk of nonpayment.

If a customer fails to pay due to insolvency or other specified reasons, the factor absorbs the loss. Non-recourse factoring typically involves higher fees to compensate for the additional risk taken by the factor.

Businesses may choose invoice factoring as a solution to manage cash flow, cover operational expenses, or fund growth without relying on traditional loans. However, it’s important for businesses to carefully consider the costs, terms, and impact on customer relationships before entering into an invoice factoring agreement. We can speed up this process and ensure you are evaluating the right options for you.

Do you want to know if you are eligible for invoice factoring or want to compare different financiers to make sure you know you’re getting the best invoice finance facility? Then you’re in the right place! Pinnacle as a finance broker will not only answer any questions you have during the application process but be there throughout your business journey.