Invoice factoring is a specialized type of business transaction, a practice in the field of debtor finance akin to selling the titles to loans. In these transactions, a business sells its accounts receivable (the money others owe their business for goods and services) to another, third party (known as the factor) at a discount. This is an ancient practice and some speculation among archaeologists holds that a prototype form of this practice is mentioned in the Code of Hammurabi. Its modern form has roots in the financial systems of the European Middle Ages until becoming more recognizable after the Enlightenment. The modern practice is currently governed by a wide range of laws and widely agreed upon accounting practices among most companies in the world.
Also called accounts receivable factoring, factoring and accounts receivable financing, this practice is widely used by businesses that have an immediate need for cash to cover expenses but few other ways to get it as quickly as they need. Invoice factoring rates are, in essence, the amount of money the third party factoring service takes out of the value of the invoice your business is owed. There tend to be multiple types of factoring rate in most traditional factoring services, some of which can range up to 20 percent of an invoice’s value. Thus, if an invoice were factored (sold directly to the factoring service) at a rate of 20 percent and was for a full thousand dollars, your business would be paid 800 dollars for the invoice that would then be the responsibility of the factoring service to collect.
Other companies offer other types of payment plans. The fee at Invoice Payment System Corp. is a flat 0.1 percent per day of the sold invoice’s face value. An invoice with a twenty five day face value, for instance, on that same thousand dollar invoice, would become a rate of 2.5 percent and thus the invoice would sell for 975 dollars. Other companies have their own structures, but with the dawn of mass telecommunications and modern finance, the practice of invoice factoring is getting easier and more convenient for everybody involved. Digital signatures, internet cash transfers and systems that sync up with ever more powerful yet easy to use accounting software are all making this practice an easier, and thus cheaper, one to accomplish. While not every invoice factoring company takes full advantage of these new developments, a growing number are eagerly embracing these innovations.
As a result of the upsurge of technology in finance, invoice factoring rates can, though certain buyers, become lower than ever before. Once a part solely of the garment and textile industries, this method of financing is becoming more and more popular among all kinds of businesses as economic uncertainty the world over makes immediate cash pay outs look more attractive. If your company has unpaid invoices but needs cash immediately, it may not be a terrible idea to contemplate invoice factoring. But knowing where to get the best rates can make a world of difference.