Invoice Factoring &
Invoice factoring is a financial service that helps small businesses improve their cash flow. Factoring companies provide this special type of asset-based lending so that companies can increase their chances of thriving in today's economic environment where it's common practice for customers to extend trade credit terms of 30 days or more. If our financial industry did not have accounts receivable financing, many businesses would not survive.
Is Invoice Financing Right For Me?
If you 're having health problems, you need a doctor. It's no different when your business is suffering from cash flow problems. You've got to get help and often you've got to get help quickly. Fortunately, invoice financing may be your answer.
Often times, businesses don't qualify for bank financing. Other times, you don't have time to get a bank loan. Common reasons for not using bank financing include
- You don't have 2 to 3 years history of profitability.
- You don't meet all the requirements for a bank loan.
- You simply can't wait 2 or 3 months for a bank loan approval.
Good news - invoice financing can be as effective as bank financing, sometimes even better. Here are some things to consider when determining if invoice financing is right for you:
"If you got paid for sales the instant you made them,
you would never have a cash flow problem."
Accounts Receivable Financing: No Debt!
Invoice factoring is a method of business financing in which a company sells or assigns its invoices or accounts receivable to a factoring company at a discount in exchange for immediate cash. Factoring improves cash flow because the company doesn't have to wait 30, 45, 60 days or more for the collection of its accounts receivables.
Invoice factoring is commonly referred to as:
- Accounts receivable factoring
- Accounts receivables financing
- Invoice financing
- Invoice discounting
Factoring is not a loan as it doesn't create debt or require you to make loan payments. Invoice factoring is not the same as bad debt collections because factoring companies don't purchase past-due receivables. They may purchase receivables that become past-due, but factoring companies don't buy past-due receivables.
Factoring Receivables: The Process
Accounts receivable factoring generally occurs in six sequential steps. It begins with the completion of selling your product or service to the final step of receiving your final payment.
Here's a look at the entire accounts receivable factoring process:
- You complete services for your customer.
- You send your invoices to your factoring company.
- The factoring company ensures the services were completed then sends the invoices to your customer.
- The factoring company sends funds to your bank account, usually within 24 to 48 hours. If the advance rate is 85% then you receive 85% of the invoice and the factoring company holds a reserve of 15%.
- The factoring company collects the receivables from you customer.
- The factoring company sends you the reserve as final payment.
Factoring companies collect their factoring fees either on the "front-end" or "back-end". Front-end fees are collected in step four while back-end fees are collected in step six.
This entire process is repeated for each invoice or batch of invoices that you factor. At any time, you can request reports that show your outstanding invoices, paid invoices, and past-due invoices.
Typically, you don't have to factor all your invoices. You select only the customers that you want to factor which gives you flexibility on how much and which customers you decide to factor.
Invoice Financing Benefits
We've discussed several benefits of accounts receivable financing including cash flow improvement and the avoidance of debt. Here's a complete list of the many benefits of factoring services.
Improved Cash Flow
Accounts receivable financing improves your cash flow because you don’t have to wait 30, 45 or 60+ days to collect your receivables. You get the cash quicker so you can pay for supplies, payroll and other operating expenses.
No Loans or Debt
One of the best features of receivables financing is it doesn't involve debt or loan payments. Invoice factoring allows you to manage your cash flow without incurring risky debt.
Quick and Easy
Many factoring companies can approve your factoring application within several business days. Often, you can get your first funding within 5 to 10 days. Invoice factoring is usually a quick and easy process.
Factoring companies handle your accounts receivable management such as billing, collections and reporting. Factoring your receivables can often pay for itself in man-hours saved if you performed these in-house.
Business Credit Services
Factoring companies analyze your customers’ credit risk as well as credit limits so you don’t get over-extended with a customer which protects you from bad debt losses.
Peace of Mind
Nothing compares to having stable cash flow for your business. Receivables factoring provides you confidence and assurance so that you can focus on more important matters.
Invoice Factoring Rates
Invoice factoring rates depend on several criteria such as sales volume, industry risk, and AR days outstanding. Rates can vary from 2% to 6% or more depending on your situation.
Invoice factoring rates vary according to your monthly factored sales volume. Factoring sales of $500,000 per month is much less expensive than factoring sales of $50,000 per month.
Some industries involve more risk or complexity. Industries such as construction and healthcare usually cost more than industries like staffing, trucking or manufacturing.
Sometimes your customer base will affect your factoring rates. Large, stable companies pose less risk than smaller companies, so that good customers may result in lower factoring rates.
Your receivables' collection days has a big impact on your factoring costs. Because factoring rates are usually based on the outstanding days of your receivables, higher collection days results in higher costs.
Fixed vs Adjustable Rates
Flat rates are useful for controlling your costs when your collection days are relatively high. Adjustable rates are best when your collection days are low. Of course, any cost scenario depends on your circumstances.
Compare rate structures with an invoice amount of $10,000 and collections days of 60 days.
Factoring Services agreement
Before you sign a factoring agreement, you should be familiar with the process. Most agreements are fairly straight-forward, but some can be difficult to understand. If you're not sure about the document language, then you might want to consult an attorney. Here's the basic process of applying for and signing the final agreement.
The Application Process
A typical factoring application requires a list of your customers, an accounts receivables aging, and sometimes financial statements. You'll also provide the factoring company with personal and business information.
Evaluating Your Risk
Factoring companies must evaluate the risk of factoring your receivables. They analyze your customers' credit as well as your business situation. If they determine the risk is too high, then you may not get approved.
Signing the Agreement
You'll sign the factoring agreement as well as other required documents such as a personal guarantee. The agreement or contract terms include the contract period, factoring rates, cancellation fees, additional fees and other terms.
Filing a UCC-1 Statement
Your factoring company will file a UCC-1 financing statement to give notice that it has an interest in your accounts receivables, and possibly other business assets.
factoring company Selection
Never settle for the first factoring company you see in a Google search. Do your homework before selecting a factoring company. Your best resource is FactoringClub.com with complete information on over 100 factoring companies.
Search Your Industry
You must find a factoring company that provides factoring services in your industry. Even though invoice factoring is fairly standard, some industries require factoring expertise such as construction, healthcare, international, and trucking.
Evaluate the Company Representative
When talking to the company sales person or representative, gauge his or her attitude, helpfulness and transparency. Ask these questions after speaking on the phone or in person:
- Is the person genuinely interested in you and your business?
- Does he or she answer your questions knowledgeably and clearly?
- Does the person respond to you in a transparent and timely manner?
During your initial conversation or visit, determine if the factoring company shares your values and has your interest in mind. You want someone who is friendly, knowledgeable and responsive to your needs.
Get a Cost Estimate
A factoring company should give you an idea of your factoring costs based on your sales volume, collection days and customers. Determine how they calculate your costs. Do they use a flat rate or an adjustable rate?
Ask for the Contract Terms
Ask the sales person or representative about these terms or conditions:
- Application or start-up fees.
- Additional fees such as processing or handling fees, and credit check fees,
- Monthly minimum fees if you don't meet a monthly sales amount.
- Contract length, cancellation notice and cancellation fees.
Get as much information as possible up front, so you don't waste your time later. If necessary, obtain the services of a qualified factoring broker. Call FactoringClub for help at 866-748-7111. We offer free broker and consulting services.
Do you want a local service?
Many businesses don't really care where their factoring company is located. They just want the most affordable rate they can find. With today's technology, anyone can perform factoring services from a distance without any problem. However, if you prefer a local factoring company, then you'll want to search our listings on the FactoringClub website. First look in your industry, then select your state.
FactoringClub is the most comprehensive source of information for invoice factoring companies. FactoringClub helps you find the right factoring company. Search our listings or call our factoring experts at (866) 748-7111 for assistance.
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