Invoice Factoring for Grocery Store Owners
Invoice Factoring for Grocery Store Owners Explained
Invoice factoring is a business financing product that allows a company to obtain immediate payment for their open receivables by selling them to a third party. The main benefit of invoice factoring is that it eliminates the need to wait for customer payments to obtain cash. This can make it much easier for you to grow your business and pay your regular expenses, such as payroll and bills.
Advantages of Using Invoice Factoring for Grocery Store Owners
- Eliminates Need to Wait for Customer Payments
- Simple Financing Solution
- Doesn’t Add to Your Debt
- Approval Based on Credit History of Customers Instead of Yours
With invoice factoring, you receive immediate cash, which you can put to use to grow your business or meet your regular financial obligations. As factoring isn’t considered a loan, it doesn’t create debt. The amounts received from invoice factoring are based on the credit history of your customers and not that of your business. This makes it an attractive option if you’re having trouble qualifying for other business financing products or don’t want your company to take on more debt.
How Invoice Factoring for Grocery Store Owners Works
Other terms used to refer to invoice factoring are receivable factoring or accounts receivable financing. The process is quite simple. You start by choosing a factoring company and enter into an agreement with them. You then perform the work and create an invoice as you normally would. The difference is that you send your invoices to the factoring company instead of directly to the customer. Once the invoice is purchased by the factoring company, an advance of around 90 percent will be deposited to your bank account. Once the invoice is paid by the customer, the remaining balance will be forwarded to you by the factoring company, minus a small fee.
Steps Involved in the Invoice Factoring Process
1. Provide the products or services to customers and prepare bills as normal.
2. Send the prepared invoices to the factoring company.
3. Quickly receive a cash advance based on the amount of the invoices.
4. Customers make their payments to the factoring company.
5. The difference between the total invoice and advance amounts, minus a fee, is paid out by the factoring company.
How Invoice Factoring for Grocery Store Owners Compares to Other Business Financing Solutions
If you need working capital, you may think that the simplest solution is simply to turn to a bank. However, working with a bank will come with some disadvantages. The process of obtaining approval for any lending product can take at least several weeks. Any line of credit or loan that you get will also add debt to your balance sheet. Information on your company’s credit is used by banks to determine whether you qualify for financing and they are often reluctant to approve businesses with limited or poor credit history. Even if you’re able to obtain a loan or line of credit, the amount you qualify for may not be enough to truly enable your business to grow.
Invoice factoring gives you a simpler and faster alternative. You can get approved the same day. Your factoring line will be based on the credit histories of your customers, instead of information coming from your personal or company credit reports. As factoring lines can range from $50,000 to $20,000,000, they provide ample opportunity for your business to grow.
Important Elements of an Invoice Factoring Agreement
The invoice factoring agreement is a contract between you and your factoring company. The main components of such an agreement are the service contract term, volume commitment, advance rate and factoring discount.
Invoice Factoring for Grocery Store Owners Agreement Length
Terms provided under a factoring contract can range from three months to multiple years. Month-to-month agreements are also available.
Minimum Factoring Volume
The majority of agreements will come with a volume commitment. By agreeing to factor at least a specified volume of invoices, you can obtain the highest advances and lowest fees.
The amount a factoring company will be willing to advance will depend on several variables, such as invoice volume, pay trends and the credit histories of your customers. The advance rate will typically vary from 70 percent up to the full invoice amount.
The factoring fee is what the factoring company charges you for their services. The fees you pay will depend on the industry you operate in, customer payment habits, as well as the quantity and value of the invoices submitted. Certain factoring companies will charge a fixed fee for their services, while others may have a fee structure that includes the factoring fee, plus separate charges for administrative and support services. You should read your contract thoroughly to be certain of exactly how much you’ll pay and fees. If there’s something you don’t understand, don’t hesitate to ask the factoring company for clarifications.
Main Types of Factoring Companies
There is no shortage of factoring companies doing business in North America. Selecting the right one is important to the success of your business. The factoring company you go with should be able to easily meet your cash requirements and offer services that genuinely add value to the relationship.
Specialist and Generalist Companies
Now that invoice factoring is used in a wide range of industries, companies that provide this type of business financing can be divided into either generalists or specialists.
Factoring generalists provide financing to many different industries. In most cases, the bulk of their clients will be smaller companies spread out across various industries.
Factoring specialists are financing providers that primarily service one specific industry. While they may sometimes factor invoices for other types of businesses, the vast majority of their clients will be in their industry of specialty. Factoring specialists usually serve small to mid-sized business.
Recourse and Non-Recourse Factoring Companies
Another major classification of factoring companies is recourse and non-recourse. There’s an important distinction between them, so you should be sure to understand the difference when looking for one that will serve your business.
Recourse factoring companies are the most commonly encountered. Recourse factoring gives the company the ability to sell the invoice back to you should the customer fail to make their payment within a time period defined in your contract. This is usually 90 days or more.
Non-recourse factoring companies do exist, but their type if much less commonly seen in the factoring industry. Non-recourse factoring means that the company assumes all credit risks associated with collecting on the invoices you sell and can’t sell them back to you if a customer fails to pay. Be sure to read your contract’s fine print, as some factoring companies may claim to be non-recourse in their promotional materials, but may reserve the right to sell an invoice back if it falls under certain criteria to be exempt from their usual policy.
A fully non-recourse factoring company that never exempts invoices will take on a higher amount of risk. Therefore, they’ll charge fees that can be significantly higher and will have stricter credit review practices.