Invoice Factoring and the Lock Box

Invoice Factoring and the Lock Box

Our calls with clients always involve providing them with improved working capital for the growth of their business. This almost always involves a conversation on invoice factoring also know as accounts receivable factoring.

An invoice factoring agreement is a buy/sell agreement whereby the factoring company purchases a company’s accounts receivable for a period of time. This time period is usually up to 90 days with some exceptions out to 120 days.

The invoice factoring company will advance between 75-90% of the face amount of the invoice on day 1. The factoring company will then wait for the customer to pay. This alleviates the cash burden sometimes felt while waiting for customers to pay.

A key requirement in an invoice factoring arrangement is the lock box. A lock box is a dedicated address where all customer payments are to be made. Customer payments pay down the advance the invoice factoring company made against the invoice. The lock box provides the factoring company with a certain level of control when managing repayment.

Some clients have hesitancy with using a lock box. They are concerned with how factoring their invoices will look to their customers. Specifically, they are concerned with the customer thinking they are in financial trouble. This is not always the case. In fact, rarely is it the case. Fast growing companies use invoice factoring to fund the growth of their business. Not having the cash to fulfill orders makes the negative impression.

Combining invoice factoring with purchase order funding and/or supply chain finance will provide even greater cash flow options for the company. More on that in the next blog.

If your business is growing and invoice factoring could help eliminate your cash flow concerns, give us a call 714-719-8966.

To your success!