What Is Invoice Factoring and Where Did it Come From?

For small business owners out there today, invoice factoring may be a new practice that has become an essential tool, however, accounts receivable factoring is nothing new to the business world. Since the ’80s, invoice factoring has been a practice used by businesses to sell invoices, or accounts receivable, for a discounted price. This is especially helpful when funding new ventures or ensuring a steady cash flow that is constant and assists in avoiding shortfalls of the business owner.

Bank lending and other types of institutional lending have been, for many years, in use to obtain funding for business ventures, but with the downturn of the economy, small business owners have found that invoice factoring can be much more ideal.

 A Growing Need

Although invoice factoring is not a new practice, many businesses have never known about the resource, or never considered it as an ideal resource to use for business funding needs. With the economy causing many businesses to lose stability financially and with credit ratings, there are many more business owners taking a second look at the effectiveness of invoice factoring in conquering business costs and ensuring financial stability.

How Invoice Factoring Works

Invoice factoring is a practice in which a business owner will take all credible invoices that are due to be paid within the next 90 days, selling to the accounts receivable factoring provider for a discounted price. The cash is immediate for the business, and though a small percentage is kept as a retainer until client payment is received, the business is able to utilize a great deal of cash that is already due to them.

Getting this funding without having to wait on clients to make payment is exceptional for businesses that are seeking the best method of obtaining cash without having to wait months for denial or have credit-based loans that could cost almost double when repaid. Letting go of the responsibility of the invoices is one benefit, with instant cash being another benefit of invoice factoring to business owners that are looking for a way to stay above the economy, remaining financially firm.