Instead of waiting weeks or months for approval for a bank loan, you can use a faster financing method to get money in your account within 24 hours. By using a quicker way of keeping your business afloat, you can ensure you don’t go into debt, you maintain a healthy working relationship with clients, you pay employees on time, and you open the door for new clients to increase your working capital and reputation in your business sector.
FAQs About Invoice Factoring
What Is Invoice Factoring?
Invoice factoring, which is also sometimes called receivables financing, is the process of a third-party company taking ownership of your unpaid invoices. While the third-a[rty company has your invoices, they will provide you with a certain percentage of the unpaid invoice receivable so you can obtain immediate cash flow.
Like receiving a bank loan, but with a much faster approval process and higher interest rate, invoice factoring involves paying the customer between 70 and 90% of the total invoice assets to maintain a steady cash flow. Businesses often choose to use invoice factoring when they are currently struggling to keep clients, pay employees, or pay vendors.
By making your accounts receivable, you can have quick and almost immediate access to your income and working capital. This rapid cash flow lets you continue building your business instead of focusing on paying off debts at the beginning of your startup process.
Is Invoice Factoring The Same As A Bank Loan?
Invoice factoring is not identical to a loan, although it has some similarities. Both processes require the client – the person who needs the money – to go through a third party to obtain the necessary capital to keep their business afloat. However, there are key differences that make invoice factoring different from bank loans.
The factor in invoice factoring purchases your receivables at a lower price, meaning you don’t have to repay interest to the factoring company or deal with debt on your account balance sheet. In addition, the approval process of invoice factoring is much quicker than bank loans, which can sometimes take weeks or months to receive approval.
How Does Invoice Factoring Work?
Invoice factoring follows specific steps in every instance and for every business. By knowing the step of invoice factoring, you can ensure the company you are doing business with is reputable and following the proper procedure.
- The company submits unpaid invoices for work completed. The unpaid invoices can range in price and amount of time unpaid, with some companies taking between 30 and 90 days to submit an invoice payment.
- The factory company will verify the invoices and pay you the funds within 24 hours of receiving the invoice. The factoring company will usually have a rate of between 70 and 90%, depending on your current company’s income, work history, and credit score of the clients on your invoice sheet.
- The factoring company collects payment from your clients according to your pre-set contract or payment terms (whether they have to pay upon project completion or within a 30, 60, or 90-day period).
- When the client receives the payment, the invoice factoring company will pay the remaining invoice amount, except for a small factoring fee.
- For example, if the invoice were for $5,000, the factoring company would give you between $3,500 and $4,500 upfront to obtain cash flow and capital to continue working, paying vendors, and paying employees. When the client pays the $5,000, the truck factoring company will pay the rest to your account and keep a small fee.
What Businesses Use Invoice Factoring?
So, what kind of businesses and business sectors benefit and use invoice factoring? This type of financing is widespread in industries that involve selling goods or services to other companies. Factoring companies help companies of all sizes and ages, helping startups and big corporations stay afloat. The most common sectors that invoice factoring companies work with include:
- Information technology
What Is The Difference Between Recourse And Non-Recourse Factoring?
There are two types of invoice factoring programs that businesses can use – recourse or non-recourse factoring. With recourse factoring, your business is the one in charge of buying back receivables and paying any debt on a client’s nonpayment. This involves you taking a risk based on your let’s history and creditworthiness.
Non-recourse payment means the invoice factoring company will take the risk of your client potentially not paying the amount of the invoice to you, covering you for any debt. Although this may seem like the better option, non-recourse factoring often involves a higher interest fee required.
What Are Some Questions I Should Ask An Invoice Factoring Company?
To decide if a company is good to work with and has a positive reputation, you need to ask the company (and yourself) a few questions before moving forward with any contracts or deals.
How long have you been in business?
- If you are researching invoice factoring companies and find one that looks reputable and trustworthy but has no reviews, don’t select this option. Choose an invoice factoring company with multiple reviews that show the credibility of their organisation, the results of their work, and their customer service.
What are your advance rates?
- Advance rates are how much the invoice factoring company will pay you for your unpaid invoices. Advance rates usually range from 70 to 90%, depending on your company, your creditworthiness and reputation, and your sector. The most common advance rate is between 80 and 85% for most businesses, while companies in specific industries with high risk will drop down to between 70 and 75%.
What industries do you work with?
- There is no point in researching and asking questions about an invoice factoring company if they do not do business with your particular sector. Browse factoring companies online to see their specific industry or niche. Most factoring companies have sectors they thrive in, whether it is tourism, trucking, IT, or other services.
- Finding an invoice factoring company specialising in your specific industry is essential to getting the best deals and creating a trustworthy bond in a business sense.
What Are The Most Significant Benefits Of Invoice Factoring?
Using invoice factoring is an easy way to increase cash flow and maintain steady capital if you own any size company. Factoring your bills has advantages and disadvantages when compared to other business models and funding methods. However, in the long run, invoice factoring is a great way to continue earning income, pay ongoing daily expenses, and accept new clients into your business.
Improve Cash Flow & Capital Gain
One of the most significant benefits of using invoice factoring is the cash advances to ensure you can pay co-workers, vendors, employees, staff, and other people to ensure they will not say anything negative about you and keep a strong reputation.
Factoring helps your company pay workers, buy daily necessities, and increase your workload without taking on too much. Paying your vendors and employees on time can ensure they stick with your company for years to come, preventing a high number of turnovers in your business.
Furthermore, with nearly immediate cash flow, you can receive money on the same day. When paying clients, staff, or business partners, this ensures you can immediately pay them on the spot if you need to settle a debt.
Easy To Acquire
Invoice factoring is more accessible to acquire than other loan options for businesses – especially companies with poor credit scores or a lack of positive work history. Getting invoice factoring is very easy and straightforward, making it much quicker to obtain than a bank or personal loan. Furthermore, invoice factoring organisations know that each business is unique – which is why they provide individual solutions to your unique problems in your business sector.
No Long-Term Promises
Long-term contracts with financial institutions or banks can quickly lead to broken deals and accruing debt. Instead of promising too much with a bank or going in over your head, invoice factoring means you can sign a short-term contract that works for your specific needs.
Furthermore, invoice factoring is start-up-friendly for those just creating a new business or looking to become entrepreneurs. This means that your company does not have to be around for a long time or have a high creditworthiness ranking before earning an invoice factoring loan.
If you are a new company that has to get started, earn clients, and build in size before earning the trust of other companies and banks, an invoice factoring company can help you start your business.
Potential Of Growth With Your Business
Invoice factoring gives you the opportunity for your company to grow without having to turn down new potential opportunities or cancel a client’s contract that could be lucrative in the long run. In addition, invoice factoring can increase in size along with your ever-growing business. Instead of bank lines with credit limits and loan sizes, your invoice factoring company can grow with you in size.
Invoice factoring is a quick way to obtain cash flow and capital to continue keeping your business afloat and thriving. Instead of having to go into debt, say no to new clients, and shut down your ever-growing company, you can use an invoice factoring company to obtain a cash advance upfront and continue business as usual.