Single invoice factoring is the strategic method of raising financial resources against individual invoices. Since cash is locked up and tied to an asset, in this case a receivable, the procedure frees it up as it enables a business to receive money in advance on a single outstanding invoice before it matures.
Sounds confusing? To elaborate and help you understand further, allow us to put it in contrast to traditional credit, specifically a bank loan.
- Classification – It is a type of liability transaction. In other words, a bank loan is a type of debt or borrowing and therefore an obligation towards the financial provider.
- Amount – The amount of loan depends on the amount applied for which may be more or less depending on the borrower’s creditworthiness.
- Cost or Fees – It involves interests, oftentimes compounded, to be paid on top of the principal in equal installments.
- Length of Contract – A type of long term loan, it can span from at least five years to thirty depending on the terms of the contract.
- Collateral Requirements – Collateral is oftentimes always involved which can be any of the company’s or its owners’ assets. Properties would be one. It is used as a form of security against the loan in the event of nonpayment.
- Application Process – It takes weeks to months for bank loan applications to be processed. They are very meticulous and comes with a number of requirements.
Single Invoice Factoring
- Classification – It falls under the category of asset transactions. This means that it is not a debt and is therefore recorded as a decrease in trade receivables coupled by an increase in cash.
- Amount – It is equivalent to the value of the invoice being subjected to the method.
- Cost or Fees – The fee is a onetime deal which is often deductible against the total value advanced by the business. It is equivalent to an agreed upon percentage from both parties.
- Length of Contract – It is a onetime deal and does not involve lengthy contracts.
- Collateral Requirements – Because it is not a debt, there are no collaterals involved.
- Application Process – Considered to be mighty swift, single invoice factoring can be processed quickly in contrast to other financing methods available in the market. Majority of providers can approve and release cash within at least a day’s time to at most of a few days.