While large corporates can afford to hire an in-house team for credit control, small business owners don’t have the resources to do so. Late payments are a big reason why businesses often face cash flow problems. One of the inefficiencies that any small business owner has fallen into at least once is debt collection (payment collection). This graph represents a non-recourse factoring process which is the case when the invoice ownership is transferred to the factoring company. The factoring company transfers the remaining balance minus the factoring fees to the seller.The buyer pays the outstanding invoice to the factoring company on the due date.Becomes responsible for payment collection.Become the invoice owner thus, the invoice is no longer an asset (accounts receivable) on the seller’s balance sheet.Advances a certain percentage of the invoice, usually 80%.The financier calculates the credit limit (based on the risk profile of the counterparts),.The seller submits the account receivables (invoice) to the factoring company to determine eligibility.There must be a commercial transaction between the buyer and the seller as a prerequisite. Invoice factoring involves three parties – the business in need of financing (seller), the buyer purchasing the goods (debtor), and the factoring company lending money to the business (the intermediary). However, the two facilities differ when it comes to payment collection and invoice ownership. The process of invoice factoring is very similar to invoice financing process.
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