Invoice Factoring: Background
Picture a business (Business ABC) that sells to multiple different customers on credit every month. Typically, Business ABC offers these credit customers 30 to 90 days to repay their outstanding amounts. This is known as the company’s accounts receivable, which is shown as an asset on the balance sheet, but critically, is not liquid cash. On the other hand, Business ABC’s own creditors require their payments to be made in cash at the end of each 30-day cycle.
For simplicity’s sake, let’s assume that the debtors pay their dues in 60-day intervals while the creditors are required to be paid in 30-day intervals. This type of situation creates what is known as a funding gap, where the business does not have adequate liquidity to fund its upcoming debts due.
It is in this type of scenario that a solution such as invoice factoring is a viable option.