Invoice Factoring Firms

As a form of funding, factoring differs from a bank loan in at least three important ways. First, it focuses on the value of outstanding receivables from a debtor in possession, not the overall credit standing of the business. Second, factoring is not a loan; it involves the sale of an asset. Third, unlike a bank loan, it involves three distinct parties, not two (the factor firm, the operating business and the debtors).

Invoice discounting transactions provide businesses with several advantages. First, it provides immediate cash flow to fund further sales while offering continuing to offer customers extended payment terms. Second, it allows the business to capture early payment discounts and preferred customer status with its own suppliers. Third, it helps the business be nimble and respond more rapidly to market opportunities.

It can also save the business the cost of offering early payment discounts to customers to speed up cash flow. Finally, it can assist the business funding a major purchase or capital investment. These advantages can collectively be very valuable to a business needing cash flow.

Importantly, the business can continue to negotiate sales and other terms directly with customers. Its relationship with customers need not be affected by a factoring transaction. In many legal jurisdictions, this type of transaction need not be notified to customers. The collection of receivables (that is, the outstanding invoices from customers) may continue to be made seamlessly by the business without customers needing to be troubled with details of the changed ownership of their debt to the business.

Some factor firms set a threshold size limit for the firms they are willing to take on as customers. For example, a major commercial bank like HSBC might set an annual revenue limit of $10 million. Firms with sales below that limit are probably too small for HSBC to work with economically as a customer.

Export sales can be an issue but need not be a barrier. Even though some of their sales may be exports, businesses may still be able to use those in a receivables discounting transaction. These invoices may be discounted more heavily by the financier since they involve collection from a foreign-based customer.

Businesses wanting to discount their invoice factoring (invoices) through invoice factoring will be required by the invoice factoring financier to provide details of their debtor in possession. These details include standard items like trading name, contact address, the scope and nature of business activities, credit limit, and credit history. The financier will also require a detailed aged receivables schedule. This data will be analyzed by the factor firm to form a view regarding the default risk (credit worthiness) of each individual customer.