Invoice factoring is an example of non-recourse funding and a form of debtor financing where a business sells its invoice receivables to a third party in a discounted manner. A business may sometimes factor its existing receivables assets for the purpose of meeting its immediate cash requirements. It may even sell its receivables for less than its costs, if it decides to liquidate its assets.
Non-recourse funding in general is referred to as a form of debt financing.
Under this kind of financing, a creditor pays a reduced rate of interest on a particular asset or a single debt. In fact, in factoring, the payment of interest is actually made by the business. On the other hand, under an asset finance, a business buys an asset with the intention of selling it later. The sale price, however, is usually much higher than the original price of the asset.
Non-recourse financing can be in the form of an agreement between the lender and the business, which have the borrower as the party to whom the loan is extended. An agreement for factoring must have provisions for a business to pay interest only on its credit card receivables. Businesses that are engaged in manufacturing products are especially vulnerable to non-recourse funding.
Another way of describing non-recourse funding is through the term ‘non-recourse debt financing.’ This financing involves financing a business for a specific period of time, either up to one year or indefinitely, but not the whole amount, and the repayment of this debt is expected to cover the whole cost of financing.
This form of financing has many advantages including the possibility of incurring expenses through the use of credit cards in excess. However, this financing can also have drawbacks like inability to accumulate significant cash flow during the entire term of the agreement. This financing is also commonly associated with small and medium-sized businesses and can provide businesses with a good source of income.
Credit card invoicing can increase a business’s debt to equity ratio. When this ratio is high, this may cause an increasing amount of interest expense. On the other hand, the lower the ratio, the lower the interest expense. Thus, this financing can result in a lower interest rate and allow business owners to achieve better long-term liquidity. Because there is no need to incur additional debt in order to pay off the interest.
Info For the companies engaged in factoring, the advantage of this type of financing is that they have more flexibility than they would otherwise. In factoring, the company can buy an asset in the market and then sell it later at a discounted price, thereby eliminating most or all payments that are due.
Invoicing factoring allows a company to concentrate on producing its products, marketing them, and generating sales,
rather than having to focus on generating interest payments. It enables companies to concentrate on meeting their immediate operational needs and thus, increasing their revenues.
Credit card factoring provides an option to the business owner to purchase a property, which has a reasonable value. In factoring, the business owner can then repay the difference between the sale price and its total costs and interest rates of the debt. As the business owner is financing the investment through credit, the company does not require collateral or security. Since the interest rate charged by the business owner can be significantly lower than the interest rates charged on the credit card debt, this type of finance can reduce a business’ monthly interest expenses considerably.
In factoring is advantageous for a number of reasons for business owners. It reduces expenses related to interest on credit cards, reduces inventory costs, and enables the business owner to concentrate on more important business activities. The reduction in the cost of interest is also beneficial to the business owners because it helps a business to recover from the initial start up expenses faster. This financing allows business owners to avoid incurring further debt in the future.
- When factoring, business owners pay interest to the business entity that they acquire the credit card debt from.
- This finance option is sometimes referred to as a prepaid credit card financing plan.
- An in financing agreement may contain provisions that require a business to maintain a certain percentage of the credit balance as a reserve.
This reserve is the percentage of the total debt which remains after interest charges on credit card into accounts and interest charges are paid. The no funding facility may also include the provision for invo-credit, which is credit card invoicing that is used to make purchases and charge card invoices that are incurred through credit cards. This agreement is more common with small and medium-sized businesses because they typically need only a limited amount of money to start out with.