Invoice factoring (also known as receivables factoring) is the sale of a business’s accounts receivable (i.e. invoices) to a factoring company at a discount in exchange for immediate funds. Invoice factoring differs from a bank loan in three ways:
• The emphasis is on the value and collectability of the receivables, not the client’s credit worthiness; • Invoice factoring is not a loan – it is the purchase of an asset (the receivable); • A bank loan involves two parties (the lender and the borrower) whereas invoice factoring involves three parties: the factor, the client and the invoiced customer or debtor.
Allied’s Invoice Factoring Process
Allied invoice factoring process works like this: The client presents invoices to Allied in exchange for a dollar amount that is less than the value of the invoice by an agreed-upon discount and a reserve.
Allied then collects the invoices directly from our client’s customers, in accordance with the Uniform Commercial Code.
The result is an initial payment to the client followed by a second one equal to the amount of the reserve, assuming the invoice is paid in full and on time.
Allied clients typically receive funds one or two days after Allied receives the invoices.
The following is an example of how invoice factoring typically works at Allied:
At Time Invoice is Purchased:
Face Amount of the Client's Invoice
$100,000
Less: Reserve (20%, includes Discount)
20,000
Cash Advance to Client
$ 80,000
At Time Collection is Made on Invoice:
Reserve Released to Client
$ 18,000
Discount Retained by Allied (2.0%)
2,000
Total Reserve and Fees Originally Withheld
$ 20,000
The discount represents Allied’s return on capital for the cash advance provided to Allied’s client when a client invoice is purchased and typically ranges from 1.5% to 2.5% for each thirty day period an account is outstanding. The amount of the discount is negotiated in each transaction and may change under certain circumstances.
Factoring Fact
Allied Clients May:
• Have negative net worth • Have operational losses or inconsistent earnings • Be start-ups or early stage/high growth businesses • Have seasonal needs • Maintain high accounts receivable concentrations • Be highly leveraged • Experience tax problems or liens • Be in, or going into bankruptcy
