Accounts receivable invoice factoring are terms used to describe the practice of a business selling outstanding accounts receivable invoices to a factoring company in exchange for immediate cash. The business that sells its invoices benefits from invoice factoring in several ways. One of the most critical benefits is that the business receives immediate payment on its invoices, instead of having to wait up to several months for its customers to pay their outstanding invoices. The factoring company benefits as well, because it collects a fee for each invoice it purchases. But prior to purchasing the invoices, the factoring company is also able to decide which invoices it wants – and it may opt to select only the invoices that are highly likely to be paid.
The concept of factoring invoices has been around for a very long time. But in today’s modern world, invoice factoring has become more popular, more accepted, and widely available to businesses in a wide variety of industries. The main two characteristics of the type of business that can benefit from invoice factoring are: 1) the business has accounts receivable invoices that are outstanding, and 2) the business’s customers are creditworthy. There are several industries where businesses commonly opt for invoice factoring, but businesses that are in industries not typically served by invoice factoring companies, are hardly ever excluded from this beneficial option, as long as they meet the right criteria.
Following are examples of industries that commonly utilize invoice factoring:
Businesses that are Awarded Government Contracts: It’s excellent news when a business wins a government contract. However, government entities (local, state, federal, etc…) are often slow at paying their invoices. Governments, however, are almost always creditworthy. Therefore, businesses often choose to factor their government invoices.
Textile/Clothing Manufacturers: Finding a textile manufacturer that either doesn’t factor its invoices or has not considered invoice factoring is rare. Clothing manufacturers must pay for the materials they use during the manufacturing process long before the final product is sold, and payment is ultimately received. In order to keep a positive cash flow, textile manufacturers often utilize invoice factoring.
Temp Agencies, Employment Agencies, Staffing Agencies, and Recruitment Agencies: It’s extremely common for businesses in the employment industry to utilize invoice factoring for one simple reason: such agencies must pay their contracted workers before they receive payment from their clients. When contracted workers sign on with a temp, employment, staffing or recruitment agency, they are guaranteed quick payments (usually within a week of their submitted invoice). Oftentimes, the agency must wait several months for payment from their clients. Invoice factoring comes in very useful in this type of situation.
Trucking: A few of the most significant expenses associated with the trucking industry are the cost of fuel, payroll and truck maintenance. When a trucking business is not paid by its clients for 30, 60 or 90 days after invoice are submitted, it can be difficult to keep a positive cash flow. Invoice factoring solves this problem.
Construction: Large construction projects often take months or years to complete. However, workers need to be paid on time, and construction projects involve expenditures. When payment-in-full for a completed construction project is not available until the project is done, invoice factoring allows a construction business to meet its payroll demands and pay for materials and other expenses prior to the conclusion of the project.
The above industries that often utilize invoice factoring are merely examples. Businesses that might benefit from factoring their invoices are endless – as long as the businesses (and their clients/customers) meet the required criteria. Invoice factoring is an excellent financial tool that has been keeping businesses within many industries afloat financially for decades.
Editor’s Note: Greg Curtiss is President of The Invoice Bankers. Mr. Curtiss previously was a lawyer and has passed the CPA exam. He has been in business for over 25 years. You can reach him by calling 303-740-7600 or 1-888-740-1750.