Small Business Finance Options – Invoice Factoring 101

Invoice Factoring is useful but often misunderstood aspect of small business finance. So in this article I will explain what factors and how it can help certain business owners sustain their growth.

By definition, factoring is the process in which small business owners can convert accounts receivable (invoices) in much-needed working capital. Basically there are three main parties in the process

1. The collection Company – This could be any business with accounts in the form of bills. In addition, the owner of the company wants to convert the accounts of urgency working capital. In this example, let’s see this business as “Acme Corp.”
2. The End Customers – These are customers that have been invoiced by Acme Corp and are thus part of Acme’s accounts receivable system.
3. The Factoring Company – This is a financing company that specializes in providing working capital through such services as invoice factoring. This is where the Acme Corp. will go to try to convert their accounts in working capital, cash flow drive.

Now let’s assume that next month will bring some major equipment purchases for Acme Corp. They have two new vehicles for their business, along with some other equipment. The only problem is, a lot of their money is tied up in the form of bills. This represents future income, but it does not help Acme Corp. here today, and it will not help them to make equipment purchases next month. In other words, they are not considered working capital accounts.

in this common scenario, small business factoring company could step in to help Acme Corp. change their accounts receivable in current assets (which could be used to make the equipment purchase next month).

So the owner of ACME’s (Bob Smith) would work with factoring companies to transfer some or all of their accounts to the company. The factoring company would then go to Bob part of the invoice total, typically around 80 percent. Bob has just converted 80 percent of their accounts receivable in the capital that he can use to reach the equipment purchase.

The end customers (people who owed Bob these accounts) would now make payments to the factoring company, instead of sending them to the Acme Corp.

This approach to financing is not for every business. Like any other financial policies, there are many considerations that must be taken into account. But the point of this article does not say whether Factoring is right for your business, but just to make you aware of this unique approach to small business finance.