In today’s economy, business owners are all too familiar with the struggle to find the necessary capital to meet their operating needs or to finance business growth. While traditional small business financing options (such as business loans and lines of credit) are increasingly difficult to attain, invoice factoring has significantly less stringent approval requirements. This is why many business owners, especially owners of small businesses and startups, turn to invoice factoring companies for a financing solution. Is invoice factoring right for your company?
Invoice Factoring (also known as accounts receivable factoring) is the selling of outstanding invoices (accounts receivable) at a discount to a factoring company that provides immediate cash to your business. Your business receives a percentage of the invoice value upfront (known as the factoring advance), and the factoring company will take care of collecting the invoices for you. The factor will refund your business the remaining balance once all your clients have paid (minus a small factoring fee known as the discount rate).
Usually, the value assigned to the receivables depends on their age (i.e., a more current invoice will be worth more). Generally, invoice factoring is also known as accounts receivable financing, accounts receivable factoring, or accounts receivable funding.
How Does Factoring Work?
With invoice factoring, you are selling control of your invoices (accounts receivable), either in part or in full. The process works as follows:
- In the normal course of business, you provide goods or services to your customers.
- Your company invoices your clients for the goods or services they receive.
- A factoring company purchases your open invoices. Once the invoices are verified as valid, the factoring company pays you a percentage of the invoiced amount immediately. This percentage is typically between 80 and 90%.
- Customer payments are made directly to the factoring company. When necessary, the factoring company will chase invoice payments.
- Once the factor has received all the payments from your clients, they will pay you the remaining invoice value, minus a small fee known as the factoring fee.
The Benefits of Invoice Factoring
Immediate increase in working capital: Factoring releases the cash a business typically has tied up in accounts receivable and makes it available for paying expenses or for funding growth.
Predictable cash flow: Eliminate the burden of waiting for payments from customers. Instead of waiting 30-90 days, a business can factor in its unpaid invoices and get paid immediately.
No new debt: Since factoring is not a loan, it doesn’t appear on the balance sheet as debt, nor does it negatively affect your credit score. Instead, it appears as more cash and fewer accounts receivable.
Offer better credit terms: Offer customers better payment terms without creating business cash flow problems. Normally, when a business factors their customers’ invoices, they receive cash right away regardless of the terms granted to their clients.
Go after big accounts: Offer credit terms demanded by large, slow-paying corporations without depleting cash.
Take advantage of supplier early-pay discounts: Most vendors offer discounts for early payment. With the predictable cash flow provided by factoring, a business can take advantage of early-pay discounts, improve its credit rating, and offset the cost of factoring all at the same time.
Spend more time focusing on growth and less time managing receivables: Since factoring companies are experts in accounts receivable management, they provide the capability for business owners to spend less time managing receivables and more time managing their business. Small business invoice factoring services free up the time and capital you need to grow your business.
Back office support: The cost of factoring is bound to be a topic of discussion for any company owner looking to enter a factoring partnership. However, the benefits of factoring (such as back office support) easily make the accounts receivable factoring rate seem like a small price to pay. Businesses can reduce the overhead costs associated with managing accounts receivable and the processing of payments. These are services that are usually included with invoice factoring services.
As all business owners are acutely aware, an uninterrupted source of cash is the most vital element in the survival of a business. It shows where a company may be headed. Instead of hoping everything will work out, business owners can enhance their cash flow with Invoice Factoring. When cash flow becomes predictable and controllable, the business is better positioned for continued business success. In today’s lending environment, where traditional financing sources are continuing to fade, invoice factoring presents a welcome alternative.
Taking the plunge into invoice factoring could mean the difference between the successful growth of a business and remaining stagnant. You should first consider all your options, and then spend the extra time needed to examine the factoring companies you are considering working with. Carefully review contracts and work hard to negotiate discounts. In the end, using invoice factoring can provide immediate cash flow to meet your business needs.
If you think invoice factoring might be the right financing solution for your business, or if you have more questions before you take the leap, contact Charter Capital today to learn more about how we can help you.