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Invoice Factoring

When a business sells its receivables to a finance company to generate cash flow, they are engaging in invoice factoring.

Factor financing has been used in commerce for thousands of years. Ancient Roman merchants used factoring agents to manage the sale and delivery of their products. In the 16th century, Europeans used factoring to facilitate the global export of goods. Later, in the 19th century, companies in the United States used factoring to meet the high demand for European merchandise. The role of factor financing in business transactions continues today, albeit in different forms.

Today’s factoring transactions commonly involve three participants: a business with receivables, their customer, and a finance company. The business sells its receivables to the finance company in exchange for a cash advance of typically 80 to 90% of the invoice value. The finance company then manages the collection of these receivables during the customer’s payment term. When the finance company receives the full payment from the customer, the finance company will credit the outstanding amount of the invoice, minus a factoring fee, to the business.

You should consider invoice factoring, if your business:

Transacts with other businesses or government
Requires additional cash flow to support operations
Could benefit from providing longer payment terms to customers
Could benefit from improved receivables management
Requires a quicker funding solution than conventional financing

Purchase Order Financing

When a business sells purchase orders to a finance company to generate cash to pay suppliers, they are engaging in purchase order financing.

There are times when a business receives a purchase order from a customer, but it does not have enough funds to pay its supplier and ultimately fulfill the order. To solve this problem, the business can reach out to a financing company, which will buy the customer’s purchase order and pay the supplier directly for the cost of the goods. When that happens, the supplier delivers the goods to the customer directly or to the business, which then delivers the goods to the customer. The finance company will then receive payment from the customer in accordance with the payment terms and then pay the business the remaining balance of the invoices minus a fee.

Purchase order financing can therefore be a great option for businesses that are experiencing high levels of growth or volatile order flow. It can be used to fund as much as 100% of the cost of the order. So, if you sell finished goods to businesses or the government, then purchase order financing may be right for your business.

You should consider Purchase Order Financing, if your business:

Experiences rapid growth, uneven cash flow or volatile demand
Needs funding to fulfill a large order
Requires cash flow to cover expenditures
Would benefit from an off-balance sheet financing solution

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Supply Chain Finance

Also known as reverse factoring, supply chain finance allows a business to extend or maintain its payment terms with its suppliers while simultaneously providing those suppliers with the option to receive immediate cash flow.

A key component of a successful business is a healthy relationship with its suppliers. Without quality materials, a business is unable to deliver quality finished goods to its customers. So, to avoid supply issues, a business must adhere to the payment terms set by its suppliers. This means that when a business sets generous payment terms for its customers, but its suppliers require shorter payment terms, the business may experience cash flow issues.

Supply chain financing helps bridge the gap. It takes place when a business receives an invoice from its supplier and approves it, then sends it to a finance company that offers supply chain financing services. The finance company then provides factoring services to the supplier, which can select the invoices it would like to factor for cash. Following this transaction, the finance company can collect the invoice totals from the business in accordance with extended payment terms. This arrangement offers cash flow relief for both the business and the supplier. While the business receives improved payment terms, the supplier is provided the option to generate immediate cash. Supply chain finance can therefore greatly improve the working relationship between a business and its supplier

You should consider Supply chain finance, If your Business:

Requires the cash flow to secure raw materials or product
Transacts with a key supplier in need of cash flow
Experiences a strained relationship with a key supplier due to late payments
Requires a funding solution without increasing debt
Experiences rapid growth causing a cash crunch