Invoice Factoring and Financing

Invoice Factoring

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:

  1. The Company (1) (ABC Trucking) wishing to improve cash flow utilizing Sterling services
  2. Sterling Commercial Credit (2) offering factoring services, often called a ‘factor’
  3. The Debtor (3) (XYZ Debtor) who owes money to ABC Trucking for a product received or for services rendered.

Factoring example

  1. 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.
  2. ABC Trucking is owed the invoice amount ($1000) and decides to improve their cash flow by factoring the invoice with Sterling.
  3. 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.
  4. Sterling advances 80% of the invoice total to ABC Trucking’s bank ($800) on 06/05/2015.
  5. Payment is received on 07/15/2015, directly to Sterling’s lockbox.
  6. Sterling posts the $1000 payment.
  7. Sterling pays back the $800 advance.
  8. Sterling collects a fee of 1% every ten days, or $40 dollars in this example.
  9. Sterling advances the balance of $160 to ABC Trucking on 07/18/2015.

Benefit from invoice factoring

  1. Improves cash flow, often within 24- 48 hours of invoice date
  2. Allows companies to meet payment deadlines, such as payroll and fulfill new orders
  3. Reduces time and resources spent collecting accounts receivable
  4. Allows for better terms to large customers to help increase sales
  5. Enables payment to suppliers quicker, taking advantage of early pay discounts
  6. Evaluated credit limits for new customers
  7. Improves company credit rating