Invoice financing, also known as factoring, is a process whereby a company can get paid ahead of time for its account receivables (invoices), in exchange for a small discount on the total value of the account receivables.
Invoices that are yet unpaid are potential income for a company, but they are not yet bringing money in for it. Invoice financing is negotiated between the company that wishes to sell its invoices and another company, the factor. The factor purchases the invoices at a small discount of about 2-10% and then collects on them at a date 30, 60, or 90 days later. The company making the sale is benefited by having immediate use of the funds that would otherwise be tied up in its invoices, and it can then reinvest those funds for its own purposes.
Since it is known that not all invoices are paid by customers, many times recourse factoring is be negotiated into the contract. Recourse factoring allows the factor the option of returning these account receivables to the seller and be reimbursed, either with another account receivable or monetarily. In non-recourse factoring the factor does not have this option.
Invoice financing can also be informed or confidential. In a confidential contract, the customers of the seller are not informed that the factor is going to be making the collections on the invoices, and the seller will actually conduct credit control, while the factor receives the funds. If the customers are informed, however, the factor will make the collections.
Posted in 
Tags: 