Many companies who experience cash flow difficulties turn to factoring as a short-term solution. This process allows them to sell their invoice at a discount to a third party and receive an advance on the invoice within one to two days for immediate use in the business, instead of waiting the 30 to 90 days it may take for their customers to pay outstanding invoices.
What is Factoring?
Factoring is not a new concept, it has been used for centuries, and there is even some evidence of it dating back thousands of years but this has not been confirmed.
Factoring sells an invoice or invoices to a third party, in Traxia this is the Investor. Tradionally the Investors takes responsibility for collecting on the invoice, using the receivable as collateral. However, with Traxia this is handled by Liqease. In exchange, they charge a percentage of the total amount owed on the invoice.
Invoice factors are comprised of three parts: the advance, the discount fee and the reserve. The advance is the lump sum paid to the Seller within one to two days for immediate use (if an Investor does not do this then the Load Warehouse will fill it within this rough time frame.) Advances vary but are usually around 90 % of the total of the invoice. The discount fee is the amount the Investor charges for taking on the risk of the debt. Discount fees are typically 1 to 6 % of the total due but this depends on whoever is bidding. The reserve is the remaining percentage of the invoice, minus the discount fee, that is paid out to the company once the invoice has been paid.
Advantages of Factoring
Factoring offers the advantage of giving companies fast cash and liquidty instead of waiting than the normal 30 to 90 days a customer has to pay their invoice. Although the terms and timeframe can vary, typically a company can sell their invoice and receive liquidity within 48 hours. The Loan Warehouse will make sure that this timeframe is kept.
Invoice factoring also benefits companies that still in the process of building themselves up and don’t qualify for financing from a bank.
Difference between two types of financing
Invoice factoring and accounts receivable financing are similar but it is important to note the differences between the two common types of factoring. Both consist of receiving liquidity based on outstanding invoices. Factoring is actually selling the debt to a third party at a discount. Factoring is not considered a debt, and is not reflected as such on their balance sheet, which helps maintain their credit score. Account receivables financing uses outstanding balances on receivables as collateral for the company to obtain a loan.