Invoice factoring works based on selling your account receivables for fast cash. Sometimes, your customers may delay in paying their invoices. You may also not want to strain your business relationship by asking them to pay when they are not ready to pay yet. When you encounter this issue, you can opt for invoice factoring.
How Does Invoice Factoring Work?
- The first step is to choose a factoring company to work with. There are several factoring companies, however, there are some that are known to be reliable and they have better terms. These include Paragon Financial Group, Blue Vine, Altline, Payability, Harpers Partners, and TCI Capital.Paragon Financial Group offers non-recourse factoring from $25,000 to $10 million at a discount rate of 1.25% to 2% for every 30 days. There is a small origination fee, and the advanced rate ranges from 80% to 90%. Blue Vine also offers factoring that ranges from $5,000 to $5 million per month at a rate of 0.25% per week. There are no origination fees, termination fees or prepayment fees, however, there is a $15 wire fee. The discount rate is from 85% to 90%.TCI can factor a minimum of $50,000 and a maximum of $20 million per month. The advance rate is 90% and the discount rate ranges from 1% to 4% per month. There is no origination fee but there is $12.95 ACH fee and a $19.99 wire fee.Altline can offer you from $30,000 to $5 million per month at a discount rate that ranges from 0.75% to 3.5% per invoice. They will charge you a one- time origination fee of $500 and a $30 wire fee. If you do not meet the minimum requirement of $30,000 invoices per month, you will pay an additional $500. Harper Partners can fund between $50,000 and $5 million per month. The advance rate is 90% and the discount rate is from 1% to 3%. You will pay a small one-time origination fee. Payability offers a good package for businesses that process fewer invoice amounts. They fund between $3,000 and $250,000 at a rate that ranges from 1% to 2%. The advance rate is 80% to 85%.
- The factoring company will buy your outstanding invoices. They will first check the financial standing of each customer to make sure that each customer meets that requirement. They usually run checks before approving the customer. Once they have approved your customers, they will offer you an advance on the outstanding invoices.
- Factoring companies have fixed advance rates. The advance rate is the percentage of the invoice they will offer you upfront. This typically ranges from 70% to 95%. The company will offer you that as an advance and they will offer you the rest when the customer pays their invoice. You will receive 100% of the cash from the invoice. This is because the factoring company will charge fees and this fee will be subtracted from the remaining amount.
- When a customer does not pay his or her invoice, there are two things that can be done depending on your arrangement with the invoice factoring company. If it is a recourse factoring, the factoring company will sell the invoice back to you if the customer does not pay after 90 days. You may be required to replace that invoice with a newer invoice.
If it is a non-recourse factoring, the factoring company will bear the risk if a customer does not pay their invoices.
Advantages of Invoice Factoring
- Invoice factoring can help you to get funds to maintain a regular cash flow, finance a project, pay your staff, or even attend to an emergency situation.
- The funding process is faster than most loan options. The factoring company can pay you the advance in less than one week.
- Invoice factoring provides an alternative way for you to get funds even if you do not qualify for traditional business lending. With invoice factoring, you do not need to have an excellent credit history, good credit score, and some of them do not even focus on how long you have been operating. All these are important to traditional lenders and if you do not meet these requirements, you will not qualify for a loan.
- You do not need to provide collateral when you apply for invoice factoring. Some businesses are unable to get credit because they do not have collateral to secure their loans. Others are scared of losing their properties when they use them as collateral. With invoice factoring, there is no issue with collateral. Your invoices serve as collateral and there are no risks of losing properties.
- You can also maintain a good relationship with your customers since you do not need to chase them to make payments. This also saves times on your part.
- Some invoice factoring companies lock their clients in contracts that allows the invoice factoring company to factor all invoices coming to the firm. In this case, the factoring company benefits from all invoices. The borrowing company is at a disadvantage because they will lose a percentage of all their invoices. Sometimes, the borrowing company does not need cash urgently and they can wait for the customer to make payments in their own time.
- Invoice factoring is expensive. This process attracts fees, including the origination fee, discount rates, and even termination fees for some companies. This makes it an expensive funding option.