The reason why most small businesses seek financing options like loans and merchant cash advances is to mitigate the negative effects of limited cash flows. Invoice factoring is a financing option that allows you to sell your invoices to factoring companies at discounted prices. Firms who sell their invoices compromise on a little portion of their profit to avoid waiting on their customers to pay. Such a decision stabilizes firm operations thus fostering growth. Through the financing option, businesses obtain immediate access to working capital. It does not trap them in debt. Furthermore, it is conducted via a simple transaction that provides lump sum amounts of cash.
Invoice factoring allows businesses that can’t access traditional bank loans to access the financial assistance that they need through the credibility of their clients. Even though some factoring companies heavily rely on a firm’s credit scores to determine if it is eligible for the financing, some do not. In fact, firms are seldom subjected to credit scores and repayment history scrutiny when selling their invoices. Factoring companies would rather vet the clients to whom the invoices are sent. Businesses should critically consider taking this financing option if their credit scores are poor. However, their prospective clients must have exceptionally good credit scores.
Understanding the Process
People generate invoices and serve their clients after delivering products. The best invoice factoring companies employ easy and straightforward processes to buy such invoices. They just require clients to contact them for brief negotiations. When the business talks bear fruit, they give their clients upfront cash advances for their invoices. The factoring companies then proceed to collect payments when the invoices mature.
Factoring companies do not issue advances on invoices that have not been earned yet. Since the factoring companies buy invoices instead of offering debt, they must verify that the accounts receivable are credible and viable. An invoice appeals most to factoring companies if the invoices are directed to major developers and stable supplying companies.
Most factoring companies issue about 90 percent of the invoice upfront. They only pay the remaining 10 percent after collecting what your clients owe. They also charge a fee for the service.
You can sum up the entire process of invoice factoring in five simple steps.
1. Supply goods and services as usual and bill your clients.
2. Go to a factoring company and negotiate a proper deal.
3. Sell the invoices, addressed to your clients, to the factoring company and receive about 90 percent of the receivables’ worth in a cash advance.
4. The factoring company collects money from your clients.
5. Receive the remaining ten percent of the invoices’ worth minus whatever fee you agreed to yield to the factoring company.
The binding factor with a factoring company is the agreement contract it presents after productive negotiations. It should include the following details.
1) The length of service.
2) The volume commitment.
3) The advance rate.
4) The factoring discount.
The process is that simple, and it presents way more advantages than traditional banks often do.
Many businesses are accustomed to borrowing from banks when they need financial assistance. Long applications can be hectic and tiresome. Credit can take months to generate meanwhile your business suffers. Worse still, the line of credit creates undesirable debt on your balance sheet. Unlike invoice factoring, a bank loan must consider your company’s creditworthiness to qualify it. However, it can take less than half an hour to get approved for factoring. Moreover, you will have plenty of financial help to grow your business. Invoice factoring can offer you advances that can range from 50,000 to 20,000,000 dollars.
Another advantage that invoice factoring presents over lines of credit is that you do not need to provide collateral. Traditional banks place your business at an untenable position in case of any delayed payments from your customers. They also require you to process titles to property that you use as security. Such processes sometimes require that you hire experts whose charges you probably didn’t plan on paying at the time.
Types of Invoice Factoring Companies
There are many factoring companies across North America. Choosing the right factoring company is important for your business, and it should build a long-lasting relationship with the factoring company.
• Factoring specialist and factoring generalist.
The growth of factoring led to the division of factoring companies into either specialists or generalists. Those that provide its services to more than one business are referred to as factoring generalist. Factoring generalists keep client folders in many instances.
Factoring specialists only finance invoices for clients operating in specific industries.
• Recourse vs non-recourse factoring companies
Invoice factoring companies are classified as either recourse or non-recourse. Recourse factoring companies don’t transfer the risk of the customer defaulting from you. The reduced risk diminishes their charges.
Non-recourse invoice factoring companies take on all credits and risks for the collection of the invoices that they buy. For the increased risk, they charge higher factoring rates.
While loans are great for expanding or stabilizing the operations of your business, invoice factoring can do a much better job. Loans hold the potential to impact your creditworthiness negatively. Creditors can also levy heavy fines and other hidden charges at the slightest delays. Factoring companies, on the other hand, work towards building your credit scores. Even though they do not offer loans, they often report their productive lending transactions to boost their clients’ credit scores. It is within their interests to grow their clients’ financial portfolios. That is the best way through which they continue making repeat clients who bring bigger prospects when they return.