Factoring of accounts receivable (such as invoices) is one of the core services we provide at Far West Capital. But invoice factoring is also a frequently misunderstood component of small business financing, so we thought a brief explanation was in order.

(You may also wish to read our hypothetical factoring scenario using a fictitious trucking company.)

Factoring Invoices - The Players

Basically, there are three primary parties involved in the process of factoring invoices.

1. The Invoicing Company - This is the business who has accounts receivable in the form of invoices and would like to turn those invoices into cash flow / working capital. For simplicity, we will refer to the invoicing company as “Acme Corp.”
2. The Invoiced Customer - This is the customer who has been invoiced by Acme Corp and is thus part of Acme’s overall accounts receivable. Acme Corp actually has quite a few customers, so let’s refer to them as Customer A, Customer B, Customer C, etc.
3. The Invoice Factoring Company - This is the financing company that specializes in providing working capital through such services as invoice factoring. This is where Acme Corp will go to try and convert their invoices into working capital, a.k.a. cash flow. Let’s refer to the factoring company as Far West Capital — naturally!

Invoice Factoring - The Process

So now we have a company who issues invoices (Acme Corp), a group of customers who owe these invoices, and a company who specializes in factoring invoices for working capital.

Let’s further imagine — realistically so — that Acme Corp needs to leverage their accounts receivable in order to procure some working capital for their day-to-day operation. So Acme gets in touch with Far West Capital to talk about some financing solutions based on their current accounts receivable. Long story short, Far West takes on some of Acme’s invoices and advances them 80 or 90 percent of the invoice totals.

As a result, Acme Corp has the working capital they need to keep their operations rolling along. And Customer A, Customer B, and the rest of Acme’s accounts will now send their invoice payments to Far West Capital (instead of sending them to Acme).

Here’s an illustration that reiterates the process we just discussed:

Questions for Far West Capital?

This is a somewhat simplified example of the invoice factoring process, but it accounts for most of the major steps involved. If you have more in-depth questions about this process, or if you’d like to talk about the factoring services we provide, please contact a representative today.

This entry was posted on Wednesday, August 29th, 2007 and is filed under Factoring Receivables.