You may have heard of invoice factoring before. This financial solution involves selling your company’s open receivables to a factoring agency in exchange for ready cash. This eliminates the need to wait for customer payments. The immediate cash available from invoice factoring gives you working capital to get caught up on bills, pay your employees, and keep the doors open.
Here are just a few of the benefits your company would receive if you used invoice factoring:
An easy transaction
Access to immediate cash
Financing based on your customers’ credit
No additional debt
Eliminates the waiting time for customer payment
Factoring your open invoices does not increase your debt level, yet it offers you immediate cash to operate and grow your business. Your business credit is not part of the factoring process. The cash generated by factoring comes from the credit and payment history of your customers. This makes invoice factoring a good alternative for those who don’t qualify for traditional lending or don’t want to take on additional debt.
Invoice Factoring Agreements
Before you can start using invoice factoring, you need to find a factoring company and enter into an agreement. The factoring agreement is the basis on which the process works. It is a business contract that outlines certain requirements:
How long the agreement will last
The volume of receivables that you will send to the factoring company
The percentage that will be paid when an invoice is submitted (advance rate)
The fee to be paid once the customer pays an open invoice (factoring discount)
The Length of the Factoring Agreement
Factoring contracts can last for a few months or stretch out for several years. It all depends on the agreement made between the factoring company and the client. Some companies, like TCI Business Capital, offer month-to-month contracts to help meet customer needs.
The Factoring Volume
To receive the maximum cash advances and the lowest factoring fee, you will need to agree to factor a minimum volume of open invoices. This is the factoring volume.
When you turn over an invoice for factoring, the factoring company will advance you a specific percentage of the invoice’s face value. That can start at 70 percent and go as high as 90 percent. The exact amount advanced will depend on the volume, payment trends, and how creditworthy your customers are. TCI Business Capital can offer you competitive rates.
Fees for Factoring
When a customer pays an open invoice, the factoring company will deduct a factoring fee then send the balance on to you. The exact fee will vary depending on your factoring volume, your industry, payment trends, and other considerations. Some agreements call for a flat fee while others can include additional fees for administrative and support services.
The Invoice Factoring Process
Once you have a signed agreement with a factoring company, the process for factoring invoice is fairly straightforward.
Your company generates an invoice for services rendered or products bought.
Instead of sending that invoice to the customer, you send it to the factoring company.
The factoring company can purchase that invoice.
The factoring company pays the advance rate (70% to 90%) to your company. That amount gets deposited to your bank account within 24 hours.
When your customer pays the invoice, the proceeds go to the factoring company first.
The factoring company takes the factoring fee from the proceeds.
The remaining balance gets deposited into your bank account.
Invoice Factoring vs Traditional Business Loans
Many business owners automatically turn to banks to get a loan for working capital. While the traditional route, business loans are not the right choice for many companies.
The process of getting a business loan is not easy. It requires submitting reams of financial statements, then waiting weeks or months for a decision. A bank loan adds debt to your company’s balance sheet. That is if you even get approved for the loan at all.
Banks require near perfect credit before they will make a loan offer to any business. If you have no business credit or credit that is less than perfect, your company will not get approved for a traditional bank loan. This can hinder growth plans and make it difficult to make strategic moves.
Invoice factoring is not nearly so difficult. it is easy and quick. It can take as few as 15 minutes to get your company approved for factoring. We also offer factoring lines anywhere from $50,000 to $20 million.
Invoice Factoring Companies Come in Multiple Varieties
Selecting the right invoice factoring company is critical and not a decision that should be taken lightly. The right partner can meet your cash requirements while understanding how factoring can help your business. Factoring agencies also offer other services that can add value to the relationship.
Specialist vs Generalist
Factoring is useful in many industries. Because of this wide pool of potential business, factoring companies have gone in two directions.
Some factoring companies provide invoice financing to multiple industries. These companies are generalists. The majority of their customers are smaller companies.
Other factoring companies provide invoice financing in a specific industry or a tight set of related industries. These companies are specialists. They serve small to medium businesses from their niche industry.
Recourse vs Nonrecourse
Another differentiation between factoring companies is whether they offer recourse factoring or nonrecourse factoring.
Recourse factoring is by far the dominant option offered. Recourse factoring allows the factoring company to sell an invoice back to you if the customer fails to pay within a certain time period, usually 90 days or more.
Non-recourse factoring is far less common. If the factoring company takes on an invoice, they take on all the risk. If a customer fails to pay, the factoring company cannot sell the invoice back to you. Non-recourse factoring involves higher fees and more creditworthy customers when compared to the more common recourse factoring.