Invoice Factoring: How it works?

The selling of receivable invoices to third party companies or banks, to improve the cash flow of the business is called invoice factoring. The factoring company or the bank pays for the invoice immediately.

Invoice factoring

  1. The advance payment made, generally varies between 70-90% of the invoice cost.
  2. The remainder of the payment is made once the client makes the actual payment. A small factoring fees is charged by the factoring company. Here are some common costs of factoring:
    • discount charges (interest) offered
    • credit protection if required
    • service or management fees
    • notice period for ending the service
  3. Invoice factoring helps a lot in case of longer credit periods of invoices and urgent cash requirements.
  4. Longer credit periods can put a lot of pressure on the cash flow of the business
  5. Banks and specialized financing and invoice factoring companies help with the process of invoice factoring
  6. Upon factoring of an invoice, a business can immediately receive cash for meeting current expenditures and expansion plans for the business
  7. The difference between a factoring company and bank is that the process of factoring is slightly complicated in case of banks and simpler in case of factoring companies. But, at the same time, the charges of the bank are lower than that of factoring company
  8. Many B2B companies with longer credit periods need invoice factoring while since B2C companies already ask for cash payments, they do-not require Invoice factoring.

Managing Cash Flow For SME’s and Startups

Here are some important tips, to choose the right invoice factoring company for your business requirements:

 1. Transparency

One of the key qualities of an invoice factoring company is transparency of rates and fees.

  1. The pricing model of an invoice financing company must be clearly understood before choosing one.
  2. This will help in understanding the overall cost to the business.
  3. Understand the pricing structure of a number of invoice factoring companies before taking and final decision.
2. Single vs Bulk Invoice Factoring

Many invoice factoring companies insist on signing long term contracts with bulk invoicing agreements.

  1. If you do-not have a large number invoices that have a longer credit period then there is absolutely no point is signing up for such contracts.
  2. Choosing an invoice factoring company that can factor single or small quantity invoices can be helpful in this case. Go for an invoice factoring company that help you optimize the cost of factoring
4. Contracts Can be Risky

Many invoice factoring companies make you sign long term contacts and charge a high fees. These contracts, at times have a high fees and charges that are not apparent and are hidden.

  1. These can add on to the factoring costs and result in overshadowing the benefits from factoring.
  2. One should be wary of longer term contracts and look for flexible and shorter term agreements.
5. Client Retention

One should ensure that the communication with the customers is not taken over by the factoring company.

  1. This can make you lose touch with your customers and you may even lose the business.

Digital Agencies: How To Keep a Healthy Cash Flow

While invoice factoring is a useful technique for managing outstanding payments and cash flow, one can use an online invoicing tool like Invoicera, to ensure there is always enough cash with the business. Here are some  

  1. Add a late fee to invoice to get the clients to pay on time.
  2. Use automatic client reminders for getting the clients to clear the invoices timely.
  3. With Invoicera, your clients can easily make payments online and benefit from simplified payments.
  4. Use the recurring invoicing feature to send out automated invoices and shorten the payment cycle.



Veronika Tondon is a business enthusiast with extensive experience in Invoicing & Payment Process. She has 7+ years of experience in Invoicera, the leading cloud-based invoicing solution as Invoicing Consultant. Sound knowledge in business process execution, offers end to end solutions for complete automation of business processes and AR/AP processes. Contact Veronika for your invoicing requirement.

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