Invoice factoring allows you to turn unpaid invoices into immediate cash. You know that your customers will eventually pay those invoices, but you don’t have time to wait. A factoring company will buy those open receivables now, giving you quick cash to take care of bills or perhaps invest in future business growth. With an ongoing invoice factoring contract, you can continue to sell off invoices to keep the cash flowing.
5 Benefits of Invoice Factoring With Bad Credit
- Invoice factoring is a transaction rather than a loan, so it doesn’t add debt to your books.
- Decisions are based on the credit history of your customers, so your personal or business credit history isn’t a factor.
- No more waiting for days, weeks or months for customers to act on an invoice.
- It’s easier to qualify for an invoice factoring contract than it is to secure a standard business loan from a bank.
- The more invoices you factor during your contract, the more you can earn in cash advances. More money means less stress over paying bills and more growth for your company.
5 Steps to Invoice Factoring With Bad Credit Success
Invoice factoring may seem complicated at first, but it comes down to a five-step process. Once you get past the first steps, you can continue with routine business operations while spending little to no time worrying about open receivables.
- Select a company that offers factoring services and apply for a contract. You may see these services listed as “invoice factoring,” “receivable factoring” or “accounts receivable financing.” We’ll talk more about how to select the right company and read a factoring contract in a minute.
- Operate your business as normal. When you generate a new invoice, send it to the factoring company rather than your customer.
- The factoring company approves each invoice based on the credit and payment history of the customer. You will receive an advance within 24 hours of approval. The advance is typically a percentage of the money due on the invoice.
- Your customer pays their invoice, and the factoring company sends you the remaining money. They keep a small fee from the final payment, which is an amount negotiated in your contract.
- Continue to send invoices to the factoring company, repeating steps two through four until the end of your factoring contract.
Bank Loan vs. Factoring Agreement
While invoice factoring is a strategy used by many businesses to boost the amount of cash on hand for daily expenses or growth investments, there are some key differences between a bank loan and an invoice factoring agreement:
- A bank loan weighs your company down with debt, but invoice factoring is a basic transaction with no debt involved.
- While it can take weeks or months to secure approval for a business bank loan, acceptance for a factoring loan often takes as little as 15 minutes. You can receive funds within 24 hours.
- It’s difficult for many businesses to earn approval from a bank due to imperfect credit history or other financial matters. Companies offering factoring contracts consider the credit and payment history of the customers rather than the business, allowing more businesses to easily qualify.
- Many businesses struggle to get bank approval for substantial amounts of cash, but our factoring agreements generally allow lines between $50,000 and $20,000,000.
4 Elements of an Invoice Factoring Contract
The first step to trading your open receivables for cash is to negotiate a factoring contract. This is the most difficult part if you aren’t experienced with this type of transaction, but there are ultimately four sections of the contract that you should check carefully:
- Length of Contract – There are month-to-month invoice factoring contracts available, but most contracts will range from six months to two years or longer. If you want to utilize factoring as a long-term strategy, the longer terms may appeal to you. If you’re just using this as a short-term fix, you may want to negotiate a short term.
- Advance Rate – This is the percentage of the invoice amount that you will receive upfront when you sell the invoice. Rates generally start around 70 percent but may go up to 90 percent, depending on the credit history and payment trends for the customer. Your overall factoring volume may factor into the rate as well.
- Total Cost – Does your factoring company operate with a flat fee? Are there additional fees that will increase the overall cost of factoring? Administrative fees are often added, and some companies have their own fees that are hidden in the fine details of the contract. Read the terms of fees carefully and ask questions if you’re unsure about those terms.
- Expected Volume – This refers to the number of invoices that you commit to selling over time. The higher the volume, the more cash you can expect to collect from the agreement. Make sure you don’t overestimate the ability of your company to meet the volume commitment.
Selecting YourInvoice Factoring With Bad Credit Service
There are a lot of businesses now offering accounts receivable financing, but they aren’t all the same. In general, your ideal company will have enough cash flow to meet the demands of your expected invoice volume. They should also have reasonable terms that allow you to profit from the agreement just as they expect to profit.
When comparing factoring services or analyzing the value of an agreement, ask the following questions:
- Is this company a generalist or a specialist? You can often determine this by looking at the type of companies they generally serve. If they limit themselves to businesses within one industry, they’re a specialist. If they serve businesses of all sizes and in a variety of industries, they’re a generalist. It’s often easier to find a generalist, but you may prefer a specialist if there is one catering to your field.
- Is this a recourse factoring company? Most businesses offering factoring services today offer recourse contracts. This means that they aren’t forced to hold onto receivables that are ignored by your customers. If a specified period of time passes and the invoice remains unpaid, they have the right to sell the invoice back to you. If you have too many invoices coming back, it could impact your cash flow.
- Is this a non-recourse factoring company? This is a contract that places all risk on the factoring company because they cannot sell back invoices that aren’t paid in a timely manner. If you can find a non-recourse contract, you will pay higher fees. Non-recourse companies may also have stricter standards when buying invoices.