What is Invoice Factoring?

Invoice factoring is a type of financing that allows you to maintain a healthy cash flow by selling your unpaid invoices to a third-party factoring firm. The factor pays a percentage of the total invoice amount upfront, typically 70% to 90%, and then collects the full payment from your client.

Instead of waiting for clients to clear invoices, you can access immediate funds to cover expenses or invest in growth opportunities. The invoice factoring process is beneficial for businesses looking to manage working capital efficiently without taking on additional debt.

Before we move forward, here are some key aspects of invoice factoring: 

• Invoice factoring provides working capital by bridging the gap between invoice raising and clearance. 
• With this tool, the responsibility of collecting payment from the client shifts to invoice factoring companies.
• It helps ensure a predictable cash flow to cover operational expenses and improve revenue stability.

Types of invoice factoring

Here are the primary types of invoice factoring available for you:

Recourse factoring

With recourse factoring, you retain some responsibility for unpaid invoices. The factoring company advances you a portion of the invoice amount upfront. If your client fails to pay, you become liable for the remaining balance plus any additional fees (such as service fees).

Non-recourse factoring

This type of factoring offers greater security but typically comes with a higher factoring fee. The factor assumes the risk of non-payment from your client. They pay you a percentage of the value of your invoices upfront, and you are not responsible if your client defaults.

Benefits of invoice factoring

Here are the benefits offered by invoice factoring: 

• Financial predictability: Consistent advances against invoices allow you to clearly understand your financial position, allowing for better planning and decision-making.
• Access to flexible funding: Invoice factoring scales with your business growth. The more invoices you generate, the more funding you can access, ensuring support for your expanding needs.
• No debt obligation: Unlike traditional bank loans, invoice factoring does not add debt to your balance sheet. This makes it a good option to access funds without long-term financial commitments.
• Reduced administrative burden: Invoice factoring can significantly reduce the administrative burden associated with accounts receivable. You no longer need to spend time chasing clients for late payments.

How does invoice factoring work?

Here is a stepwise guide to help you understand how this form of accounts receivable financing works: 

Step 1: Selecting a factoring company

Choosing a reliable factoring provider is crucial. Look for companies with industry expertise, transparent fee structures, and services tailored to your specific needs. A good company will also provide clear terms in the factoring agreement and offer excellent customer support.

Step 2: Submitting invoices for factoring

Eligible invoices are submitted to the factoring company, usually through an online platform. Ensure your invoices are accurate and include all necessary details, such as client information, service descriptions, total invoice value and payment terms.

Step 3: Verification of invoices

The factoring company verifies the authenticity of the submitted invoices and assesses the creditworthiness of your customers. The client's business must have a good credit score and should not face any cash flow issues. This step ensures that the clients have the financial stability to settle payments.

Step 4: Receiving advance payment

Once approved, the factoring company provides a cash advance ranging between 70 to 90% of the invoice value. This provides you with quick access to funds for covering your expenses and keeping your business running smoothly.

Step 5: Final settlement after customer payment

The factoring company collects the invoice payment directly from your clients as per the invoice terms. After receiving the payment, the remaining balance (typically 30% to 10%), minus the cost of invoice factoring, is settled with your business.

Invoice factoring vs Invoice discounting

Both invoice factoring and discounting can help you access cash sooner, but they have key differences in terms of receivables and risk management:

• Ownership of receivables: With invoice factoring, the factoring company purchases your invoices, assuming ownership of the debt. You are essentially selling your invoices for a discounted amount upfront. In invoice discounting, you borrow money against your invoices. You retain ownership and are responsible for the collection, but you pay interest on the advanced amount.   
• Risk of default: Invoice factoring typically shifts the risk of non-payment to the factor. If your client defaults, the factor bears the loss. With discounting, the responsibility remains yours. If your client does not pay, you are liable for the outstanding balance.   

Why choose Zomentum for your invoicing?

At Zomentum, we understand the challenges freelancers and consultants face in managing their finances. That is why we offer a comprehensive invoicing solution designed to simplify your workflow and accelerate your cash flow.

Our intuitive invoice management solutions streamline the entire invoicing process, from creating professional invoices to sending them to clients with just a few clicks. You can easily customize invoices with your branding, track invoice status, and automate recurring invoices to save valuable time.

Facilitate swift approvals with our electronic signature feature. Clients can sign documents on any device, and each e-signature is legally binding, providing you with a secure and efficient way to finalize agreements.

Zomentum also integrates seamlessly with popular accounting software like Xero and QuickBooks. This integration ensures that your financial data is synchronized, simplifying bookkeeping and financial reporting.

Want to give Zomentum a try? Get a 30-day free trial today!