Factoring is a financial transaction whereby a business sells its invoices to a third party (called a factor) at a discount.
Factoring and invoice discounting are two services that finance providers traditionally supply.
How does factoring work?
For many small companies, “factoring” is the “f-word”: it’s restrictive, it’s expensive, but sometimes necessary. Banks charge high fees to extend credit against money that should be paid to the SME much sooner than it actually is.
In invoice factoring, the factor provides financing to the seller of the accounts in the form of a cash “advance,” often 70-80% of the invoice face values, with the balance of the purchase price being paid, net of the factor’s discount fee (commission) and other charges, upon collection. The emphasis is on the value of the invoice which is essentially a financial asset. The seller is borrowing against its debtors.
The three parties directly involved are: the one who sells the invoice, the debtor (customer of the seller), and the factor (financial organisation).
- The seller sells one or more of its invoices at a discount to the third party, i.e. the factor, to obtain cash
- The sale of the invoice basically transfers ownership of the invoice to the factor
- Usually in factoring the debtor is notified of the sale of the invoice, and the factor bills the debtor and makes all collections. The seller forfeits their credit management.
There are three principal parts to an invoice factoring transaction:
- the advance, a percentage of the invoice face value that is paid to the seller at the time of sale
- the reserve, the remainder of the purchase price held until the payment by the account debtor is made
- the discount fee, the cost associated with the transaction which is deducted from the reserve, along with other expenses, upon collection, before the reserve is disbursed to the factor’s client.
The MarketInvoice offering
Marketinvoice is very different to the main short term source of working capital finance, factoring.
Our three main advantages are flexibility, cost and scope.
- In terms of flexibility, using Marketinvoice you sell the invoices that you want, when you want
- Unlike traditional factoring, there is no obligation to discount your entire debtor ledger
- No lengthy lock-in periods
- No personal guarantees
Marketinvoice puts you back in control of your cash flow as we provide a solution to late payments, with a form of alternative online invoice discounting. Good credit management is absolutely necessary for a small growing business however late payments are fact of life even for the best-run businesses. We see ourselves as providing those well-run businesses with working capital and cash flow solutions, an area which hasn’t been satisfactorily filled by existing players in the market.