How does factoring invoices work?
Most invoice factoring services run things a bit differently. The concept of selling your invoices to the factoring company for immediate cash is very attractive to many small business owners who need better cash flow. The way invoice factoring works is you sell your unpaid invoices for immediate cash. The factor then will wait for payment from your customers.
Factoring invoices sounds like a great solution for cash flow, but what will your customer think? This will really depend on which factoring company you use and what kind of industry your business is in. It’s pretty uncommon for a business to have never seen invoices that were to be paid to a factoring company. Any larger company that is doing business with smaller companies has most likely paid invoices to a factoring firm. The important thing is to keep your customers informed and make sure they understand you are simply using a funding tool to help your company grow and better service your customers. It’s also critical to check out your factoring company and make sure they don’t have a history of negative comments and complaints.
After your business applies and gets approved for invoice factoring you will be sent final documents so the setup process can be completed and you will be ready for factoring invoices. You can then upload or email images of the invoices and your factoring company will confirm the invoice information and then wire or ACH the funds to your selected checking account. Most factors advance 80% to 90% of the invoice total unless its in the trucking industry. That industry can get advances as high as 99%. Once your customer pays the factored invoices the factor will process the payment you will get back any reserve held back less the accrued factoring fee.
Find out more about factoring invoices.
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Small business owners have discovered that invoice factoring can be an alternative to bank loans
Many small business owners have learned that if you have accounts receivables you can factor invoices instead of getting a loan at the local bank. A factor credit line can be used like a bank loan even if you do not have years of history to show the factor. Since invoice factoring relies on the credit quality of your customers you can use this business funding even if you and the business don’t have the established credit that banks want to see.
Comparing Factoring Companies
When you look around for a factoring company its very important to look at rates and structure very closely. We recommend that you have each factoring firm provide all the fee’s that they may charge in addition to just the factoring discount fee. Once you get to the point of making a decision you should then ask for the final contract or documents and review all the fees outlined in this document to make sure no hidden fees exist that were not discussed or presented up front. Once you confirm all is good you can then do your own internet search using the factor’s name to look for negative or positive comments. Often the worst factoring companies have hundreds of very upset customers that leave reviews online that can be easily found.
Factoring Term Contracts
We also recommend avoiding factoring companies that insist they need a long term contract. Normally you can request a 6 months or shorter trial period to make sure the factoring company you select does not have poor customer service. We get calls daily from business owners that have signed long term contracts and they are forced to put up with poor service. You can avoid this mistake by negotiating a shorter term contract. If the factor truly offers good customer service they would have no need to lock you into a long term contract.
We offer one of the fastest factoring invoices program available in the United States and Canada and we would welcome the chance to provide you a competitive quote. Take a minute and fill out our quote form to find out what rate we can offer your business.
How much does invoice factoring cost?
After a factoring company decides to work with you they will make a written proposal to outline the terms and conditions. When you factor an invoice the factor will keep a percentage of the invoice which is called the factoring discount fee. Most often this fee ranges from 1% to 3% with today’s current pricing. The fee is typically determined by the quality of your customer accounts in terms of credit risk and how long the factor will wait on payment. Volume also plays a big role since most factors will offer a lower rate to customers who will factor more invoices and generate more fee income for the factor.
This is the cost of business doing business with your factoring company. If your discount fee is 2.5% and you factored a $10,000 invoice your factoring cost would be $25. Business owners familiar with quick pay discounts will notice this is a very similar fee, but you are controlling the cash flow as the factor will take you up on the quick pay every time you submit invoices from qualified customers.
Invoice factoring allows you to offer better payment terms to get more sales
Most of the time doing business with the largest and strongest companies requires that you offer extended payment terms. If you cannot allow a company to have 45 payment terms they will most likely find another small business that will offer the payment terms they need. Once you are set up with factoring invoices offering 30 day or longer payment terms is no longer an issue.
How invoice factoring can be used to boost cash flow
This is a short list of how a small business can put factoring invoices to work
- Stress free payroll knowing you have funds available
- Funds available for additional marketing and sales
- Negotiate better terms for inventory
- Take supplier discounts by paying quickly
- Purchase new equipment
Over the years rapidly growing companies have used invoice factoring for growth. Many of these business owners have since retired after selling the successful company.