When you need quick cash, you cannot afford to wait around for a bank to decide to approve or reject your loan application. Invoice factoring is one financing option available for businesses. It entails the business selling open receivables to the provider. In return, the business gets immediate cash. Basically, you are selling your future invoices to the company and getting pre-paid for them. With these funds, you can meet payroll, pay your bills and cover your operating expenses.
The Benefits of Small Business Invoice Factoring
There are a number of reasons why companies use this type of option. In most cases, the business needs quick cash and does not want to wait for a bank to slowly approve their loan. A bank loan can add debt to your balance sheet, and you can only get a loan if you have good credit. Since invoice factoring is not a loan, you do not accrue debt. It is only based on your customers’ invoices, so your credit score is not an issue.
Simple transactions: You can get approved for invoice factoring in just 15 minutes. Then, the cash is deposited in your account in just 24 hours.
Immediate cash: Unlike a typical loan, you do not have to wait weeks or months to get approved. You get the cash you need when you need it.
Does not increase debt: You do not want to add debt to your balance sheet. With invoice factoring, you do not have to.
Based on invoices: This cash advance is not given according to your credit score or personal creditworthiness. Instead, it is based entirely on your customers’ credit. If you have the future invoices to back it up, you can qualify for invoice factoring.
No waiting: Any business owner can tell you horror stories about waiting months for a client to pay an old debt. Businesses need their invoices to be paid to cover operating costs. If you are concerned about waiting for customer payments, invoice factoring gives you immediate cash and financial flexibility.
The Steps Involved in Small Business Invoice Factoring
The initial step is to talk with the factoring company and continue your normal work. You start an agreement with the factoring company that entails the amount, timeline and other details of your contract. Instead of collecting the invoices yourself, you send them to the factoring company.
After the factoring company has the invoices, they send you a cash advance. This is typically about 90 percent of the invoice amount. Now, the customer pays off the invoice like normal, but the money goes to the factoring company. Anything that is left after paying the advance and a small fee is given back to you.
Is Small Business Invoice Factoring Better Than a Bank Loan?
There are benefits and drawbacks to every kind of financing. A line of credit or a bank loan will generally have lower interest rates, but they also require good credit scores. In addition, these financing options also take time to get. Between the application process and getting money in your account, weeks or months can go by.
In addition, a loan limits how much cash you can easily access. With invoice factoring, the application and approval process is done in just 15 minutes. You can get $50,000 to $20,000,000 to fund day-to-day operations or take advantage of a new opportunity.
Signing the Small Business Invoice Factoring Agreement
The factoring agreement can change based on the provider and the details of your company. In general, it will include a few basic features.
The length of service: This duration can be as little as three months. In some cases, it can be several years long.
Advance rates: The advance rate is anywhere from 70 percent on up. It is based on things like your clients’ creditworthiness, your volume and pay trends.
A volume commitment: You commit to a specific volume of invoices. A higher volume will give you a lower rate and higher advance.
Factoring fees: Also known as a factoring discount, this amount is determined by your invoice size, volume, pay trends, industry and similar variables. Some factoring companies use a flat fee, but other companies charge for support and administrative services as well.
The Varieties of Small Business Invoice Factoring Companies
In North America, there are several main types of factoring companies. For your new agreement to work out, you need to find the right type of company.
Recourse Versus Non-Recourse Companies
A recourse company includes an agreement to sell the invoice to you if the payments are not made within the time frame in your contract. A non-recourse factoring company does not resell the invoice to you. Instead, they charge a higher amount because they risk the possibility of no one paying the invoice amount.
Generalists and Specialists
A factoring specialist works with one primary industry. Meanwhile, a factoring generalist has a portfolio of clients from different industries and companies.