Manufacturing invoice factoring is the way that a company sells something called open receivables in exchange for cash from a factoring company. Normally, a business has to wait for clients to pay money to get working capital. Invoice factoring lets you quickly get the working capital you need to cover payroll, pay your bills and meet your daily operating expenses.
The Benefits of Manufacturing Invoice Factoring
Invoice factoring gives you a simple transaction for immediate cash. It does not add to your debt, and you do not have to wait for customer payments. This process is based on your customers’ credit. With this type of option, you can get the immediate funds you need to run your business and to grow.
Invoice factoring is not a loan, so you are not creating added debt for your business. Instead, the cash is based on your payment history from customers. Basically, you are paying your business in advance for your future sales. If you do not qualify for traditional loans or do not want added debt, it is a useful alternative.
How Manufacturing Invoice Financing Works
This type of funding option is also called receivable factoring or accounts receivable financing. It starts when you make an agreement with the factoring company. You agree to keep selling products like normal, but the invoices from your customers go to the factoring company.
Once the factoring company gets the invoices, they give you an advance on your future invoices in just 24 hours. Normally, this advance is for 90 percent of the invoice amount. When your customers pay for the invoice, the factoring company covers the rest of the balance and their fee. Anything that is left is paid to you.
How Does Manufacturing Invoice Factoring Compare to Traditional Loans?
Normally, businesses will go to a bank to get a working capital loan. They may apply for a line of credit or a standard loan. Unfortunately, this process can take weeks or months to complete. To make the situation worse, a loan adds a debt to your company’s balance sheet.
Banks will also want to look at your company’s credit score to see if you qualify for a loan. If you have bad credit or no credit, then you cannot get the loan. Even when you have a good enough credit score to get the loan, the bank will limit how much money you can actually get.
In comparison, invoice factoring offers a much faster option. You can get approved in just 15 minutes. Your advance is determined according to your customers’ credit and not your business or personal credit. It gives you room to grow with cash amounts ranging from $50,000 to $20,000,000.
What Is the Agreement Like?
When you make an agreement with the factoring company, you sign a contract about the length of the service and the advance rate. You agree to the factoring fee and a volume commitment. The length of the contract can be between three months to several years. There are even options for month-to-month advances.
For factoring volume, you agree to continue to create a certain number of invoices. This ensures that you can get a lower rate and a larger advance. Afterward, you receive an advance from 70 to 100 percent of the invoice amount. This amount is set according to your pay trends, customer creditworthiness and volume. When you pay back the advance, a fee is removed based on factors like your invoice size and volume. This may be a flat fee or a percentage-based fee.
What Are the Types of Factoring Companies?
Right now, there are a number of different types of factoring companies working in the United States. The right company will help your business meet its cash requirements. Your initial choice is between a factoring generalist or a factoring specialist. A specialist works entirely with invoices for a certain, specific industry. Meanwhile, a factoring generalist serves many different industries or clients.
You also get to choose between recourse and non-recourse companies. A recourse company reserves the right to sell the invoice to your company if you have not paid the invoice in a set amount of time. A non-recourse company is less common, but there are still a few companies that use this method. A non-recourse company charges higher fees because they take the entire risk for whether your invoices are collected or not from your customers.