An invoice advance is an advance company can make on an invoice in order to obtain payment on the invoice immediately. Most companies have a large number of account receivables (invoices) that need to be paid in 30, 60, or 90 days. However, many companies are in need of obtaining funding immediately, but all those potential funds are tied up in invoices.
In order to make the funds available right away, the company can perform an invoice advance, also known as factoring. When a company factors its account receivables it is selling them out to a company called a factor, which will immediately pay them for the invoices, and they can use the money obtained for investment or other purposes. The amount of money obtained from the result of factoring is slightly reduced from the total value of the account receivables, but many times it will still be better for a company to factor its accounts out.
There are different possible types of factoring. Recourse factoring allows the factor the recourse of returning any account receivables to the company it purchased them from in exchange for other invoices it can collect on. Alternatively, if the two companies have agreed to non-recourse factoring the factor does not have this option and has to live with what it has. Most factoring agreements have recourse options; non-recourse factoring is somewhat offset by the small monetary discount, usually 2-10%.
An invoice advance can also be confidential or informed. In the informed, the company factoring out will inform its clients of the factor that will be making the collections; otherwise the company will make the collections on behalf of the factor.
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