Outstanding and/or ‘open invoices’ represent invoices that have been sent out to a client for payment, but have not yet been satisfied/paid by the client. These invoices can be financed or A/R discounted for less than the face value to quickly raise capital and increase cash flow.
The buyer of the A/R Invoices also know as the (factor) purchases the financial obligation at a discounted rate providing the selling firm (that’s you) with immediate cash. The factor now assumes responsibility in collecting the money owned by the original debtor (or the company you originally provided your product or services for.)
The invoice is sold at a discount, which is typically 85-90 percent of face value. The Factor requires a percentage of the invoice remains in reserve in order to reduce their total risk, in assuming responsibility for collecting the outstanding debt. Once the debt is collected by the Factor, you’ll receive the reserve amount of the invoice or the percent that was held back -minus any service fees.
Here is just one example of the fee scale from one small factoring company. Every Factor is different and you should use Factor.bid to shop your open invoices for the best deal when factoring.
If this fee structure seems high, what is the costs of not factoring?
The Costs of not Factoring:
- Time value of money
- Benefit of improved cash flow
- Cash within 24 hours
- Pay Suppliers faster
- Receive discounts from suppliers
- Make payroll without using personal finances
- Offer longer terms to larger customers
- Attract more business
- Business growth without incurring more debt at your bank
- Lowers your business liability / risk in collecting payments
Will the financial benefit of improved cash flow to your business offset the fees associated with Factoring, And then some? In many cases Factoring is a smart business decision and can aid your company in growth and new found business opportunity.