It’s one question I’m asked a lot:Â How often is invoice factoring used?
The answer is a lot! One thing is for sure: When credits market crash, borrowers seek out alternative financing.Â
Interest in invoice factoring has increased, if figures from theÂ Commercial Finance Association (CFA), a trade association thatÂ tracks asset-based lending trends, are any indication.
A CFA survey found that asset-based loans totaledÂ $600 billion in 2008, a figure that has grown sharply since the 1970s.
As traditional lending sources have dried up, companiesÂ have increasingly relied upon invioce factoring to raise much-needed cash. There’s no debt and no banks or credit restrictions involved. And businesses are able to get cash fast — in as little as 24 hours upon approval.
What Is Factoring?
Factoring is not a loan, but the sale of account receivables or unpaid customer invoicesÂ to a factoring servicesÂ provider such as MDS Funding. MDS Funding, as the factor, would collect on the invoice in exchange for anÂ upfront payment to a business.Â Â
No assets are used as collateral, but factors typically use clients’ customer debt to secure funding. So instead of waiting 30, 60, 90-days to get paid, businesses are able to receive cash upfront — before their invoice is even paid by the client.
Invoice factoring is ideal for businesses that sell to customers on credit or have long sales cycles, such as retailers. Many of these businesses use factoring as a short-term financing method.
Unlike traditional lending,Â the factoring company isn’t concerned about the businesses’ credit; it could care less. Instead, it is, however, concerned about the credit history ofÂ clients thatÂ are generating invoices. You may have to provide payment history records, invoice receipts and other documents to show that your clients will pay their invoices.
Remember, it’s your clients who the factor must trust to pay their invoice. The factor doesn’t get “paid” until clients pay.Â Â Upon approval, the factor will typically advance 95 percent of the invoiceÂ value. That, along with the factor’s fees, areÂ paid when your clients pay the invoice.Â