Find The Best Invoice Factoring Companies
What is invoice factoring?
First and foremost let’s discuss what factoring is. In business we say cash is king. Buyers and customers say payment terms are king! The right factoring company helps speed up cashflow. Most invoices have payment periods from 3 to 90 days. So, think of the value you receive from getting paid early.
Many businesses face constant cash shortages as they pay for payroll, utilities and inventory. Waiting for customer payment can prevent business operations from running efficiently. Accounts receivable factoring helps bridge that gap. Now that we know the basics, let’s dive in and learn more about how to get cash in your hands today from those unpaid invoice.
How does factoring work?
The factoring process is pretty easy to follow.
- You provide goods or services to clients on a regular basis.
- Instead of waiting for a customer to pay you, you can sell your invoices to factoring companies. The sale of the invoice is for invoice value minus an invoice discounting fee. Usually between 1 and 3% of the factored receivables.(this could be private factoring agencies or banks that offer factoring services)
- The Invoice factoring company advances you 80-90% of the approved(determined by credit checks) outstanding invoice amount.
- Now, you have your cash and the factoring company collects payment from your customer when the invoice is due after the long payment cycles. (collections is a major benefit of using factoring services)
- Your customer pays directly to factoring companies account or lock box.
- At this point, the financial institution takes back their principal amount from the advance rates, and the remaining balance is sent to you.
Advantages and Disadvantages of factoring
Like every business loan option for borrowing money, accounts receivable factoring has it’s pros and cons. If there is a need for improved cashflow and working capital, the pros heavily outweigh the cons.
Advantages of Factoring
- Better and more predictable cash flow – With invoice factoring you’ll receive payment against your invoices almost immediately.
- Better planning capability – You can plan your business and working capital more effectively when you are getting paid in advance.
- Eliminate slow pay surprises from your unpaid invoices – If you have ever had to wait and wonder when a customer will pay, you know how stressful that is!
- Protection against credit risk – Many factors will guarantee the credit of the customers in the event of a default. See Non Recourse factoring vs. recourse factoring. Having independent business credit providers is helpful when managing your risk. You don’t get this with conventional bank financing.
Disadvantages of factoring
- Invoice factoring cost can be a concern – Try to find factoring companies that are charging a factoring fee that is 1-2% per month or less. Working with the wrong factoring service providers will lead to paying more than conventional working capital financing.
- Long term factoring agreement – Traditionally most factoring companies wanted business owners to agree to longer term agreements. Today you will find more factoring providers that are willing to engage in shorter term agreements.
- Only works for creditworthy clients – You may have a number of customers and be looking for immediate cash flow. However, if you have only one invoice for a customer that is not credit approved then a factoring company will not work for you.
Let’s get back to a healthy balance sheet
Obviously your goal is to grow your company. Your plans are ready but your cash flow is not. Unfortunately, there’s too much money buried behind your accounts receivable. Having access to cash from a good factor funding company helps small business owners sleep at night.
Accounts receivable financing is often used for companies with weak balance sheets. The credit control and guidance from a strong factoring lender can help get companies back on track. When a company can plan their cash flow and manage customer payments it is easier to forecast the business operations.
Factoring vs. other types of small business lending
Many kinds of small business financing options and alternative financings exist, but not all work perfectly with every business. Some require credit or minimum operating experience. Some are simple and quick but costlier and predatory. You want a form of small businesses lending at a reasonable and manageable rate.
Traditional bank financing like a bank loan or asset based loan is the holy grail of business loans as banks usually provide the cheapest cost of capital. On the other end of the spectrum are merchant cash advances. These short term and high interest financings can seem attractive but the cost of funds is hard to deal with. Factoring lies somewhere in the middle. Absent high factoring costs, hidden fees and additional fees, factoring customers pay relatively little for such a great benefit.
How to choose the right factoring invoice companies to support your cash flow?
You will discover that factoring comes with a lot of variables when you start browsing factoring companies. Many are independent and some are owned by banks. The good news is that there is really only one way a factoring company may factor invoices. Even the best factoring service isn’t a good fit for every company in the market.
Do your research before choosing an invoice factoring company. When searching for information weigh the main options including price, advance rate, and parties directly involved when it comes time to collect payment from customers. You want fast invoice factoring. So if your company is in a niche, like trucking companies, make sure you find the best invoice factoring service that work with truckers.
Common myths about invoice factoring
Like everything else, there are also myths about invoice finance. The most common concerns include:
- I can’t let my customers know I am borrowing money. – How about you let them know there is a finance company supporting you with millions of dollars. It’s all about how you look at it. 🙂
- There are tons of hidden fees when factoring. – NO, not if you choose the right factoring partner with low factoring rates.
- Factoring and invoice finance are a last resort. – Not going to lie, for some people it is! However, for most it is not. Certainly not as bad as a merchant cash advance.
- We lose our own credit control when financing invoices. – You actually get credit insurance with non recourse factoring, the safer factoring solutions.
- It is very invasive and ties up all of my AR. – Not if you find a good spot factoring company.
Common Factoring Definitions
If you are looking start factoring approved invoices, the first step is understanding what you are signing up for. Below is a list of common terms you may want to know ahead of going on your search.
Invoice face value – The gross value of the invoice amount, and expected value invoice payments.
Asset based lending – A type of business loan where you can leverage various assets to borrow cash. These assets include accounts receivables, inventory, equipment, and sometimes IP.
Factoring facility – The size of the advance you can receive against your outstanding invoices.
Cash advance – The advanced funds the factoring company pays to your bank account under the factoring transaction.
Spot factoring – Having the opportunity to factor select or single invoices at any given time.
Recourse Factoring – In the event of a default the client is at risk for non-payment for invoice factoring services.
Non-recourse Factoring – The invoice financing company will provide insurance and guarantee the risk of non-payment from customers. *This credit insurance is typically not available from private insurance companies.
Notice of assignment – The lender will want to put the customer on notice so the customer pays the factor directly. Even though the goods or services were provided by the client, the assignment of invoices will require customer invoice payment to be sent directly to the lender.
Medical Factoring Companies – Certain invoice factoring provider specialize in medical accounts receivable.
Business to consumer invoice factoring – Some compare this to the buy now pay later options offered by different sellers.
Truck factoring – Factoring for truckers and freight brokers is a specialized fields. Learn about truck factoring myths online to find the right provider.
Accounts receivable factoring broker – A company that specializes in finding the appropriate financial institutions with factoring services for their clients. Factoring brokers evaluate your personal credit, factoring industry, and needs to find the perfect fit.
There you have it. Pretty much everything you need to to see how invoice factoring works, finding the right factoring co, cash flow, and what it all means for your business. If there is anything we missed please don’t hesitate to reach out if you have questions about how to qualify for factoring.
Application for invoice Factoring – See below
If you are ready to apply with a top invoice factoring company , START RIGHT HERE.