Invoice Factoring and Financing

Invoice factoring is a type of business financing which involves the sale of a company’s accounts receivables, at a discount, to Sterling Commercial Credit (Sterling). Sterling takes on the credit risk of a company’s debtors and will be paid back when the debtors pay the full amount of the invoice.
Who is involved?
There are three parties in invoice factoring:
- The Company (1) (ABC Trucking) wishing to improve cash flow utilizing Sterling services
- Sterling Commercial Credit (2) offering factoring services, often called a ‘factor’
- The Debtor (3) (XYZ Debtor) who owes money to ABC Trucking for a product received or for services rendered.
Factoring example
- XYZ debtor owes ABC Trucking $1,000 for shipping parts from Detroit, MI to Kansas City, MO with the service date of 06/01/2015.
- ABC Trucking is owed the invoice amount ($1000) and decides to improve their cash flow by factoring the invoice with Sterling.
- Sterling validates the invoice and verifies the service was performed via phone or email with XYZ debtor. Sterling learns the payment will be made on 07/15/2015 or net 45-day terms.
- Sterling advances 80% of the invoice total to ABC Trucking’s bank ($800) on 06/05/2015.
- Payment is received on 07/15/2015, directly to Sterling’s lockbox.
- Sterling posts the $1000 payment.
- Sterling pays back the $800 advance.
- Sterling collects a fee of 1% every ten days, or $40 dollars in this example.
- Sterling advances the balance of $160 to ABC Trucking on 07/18/2015.
Benefit from invoice factoring
- Improves cash flow, often within 24- 48 hours of invoice date
- Allows companies to meet payment deadlines, such as payroll and fulfill new orders
- Reduces time and resources spent collecting accounts receivable
- Allows for better terms to large customers to help increase sales
- Enables payment to suppliers quicker, taking advantage of early pay discounts
- Evaluated credit limits for new customers
- Improves company credit rating