As a business owner, your main goal is to maintain a steady and predictable cash flow. However, some clients may take longer to pay, with some taking more than 30 or even 90 days to settle their invoices. In this case, the funds tied to your pending invoices remain inaccessible, which will put your business in a cash crunch. This is where invoice factoring can help.
In this guide, we’ll discuss everything you need to know about invoice factoring to see if it’s the right solution for your business. Let’s get started!
What is invoice factoring?
Invoice factoring, also called accounts receivable factoring, is a service that allows you to receive instant funds from your pending invoices.
In this setup, a third-party company or a ‘factor’ like Factoring Express will purchase your eligible invoices. The company will advance up to 97% of your invoice’s total value within 24 hours. This way, you don’t have to wait 30 to 90 days for payments to arrive.
But who collects the invoices then? When you factor invoices, the factoring company takes responsibility for the collection. Once they’ve collected your invoice from your customer, they will pay you the remaining balance minus a small service fee.
Take note that factoring has two types: recourse and non-recourse.
With recourse factoring, the factoring company can charge you back the amount if your customer fails to pay. Meanwhile, non-recourse factoring gives you protection against non-paying clients, which means you can’t be forced to pay the factor back.
But is this a good solution for your business? If your company experiences fund deficits due to late payments, you should definitely consider invoice factoring.
The good thing is that you’re free to choose which invoices to factor. With Factoring Express, there are no long-term contracts and no minimums. You can also cancel the service anytime you like.
How does invoice factoring work?
Invoice factoring is a very straightforward service. Unlike bank loans, you don’t have to queue up and submit a ton of paperwork. When you factor an invoice with us, you only have to go through four steps:
Step 1. Application
Whether you need invoice factoring for a small business or a large company, all you have to do is fill out our form.
Accomplish our application form and submit all the necessary documents that our specialist will request from you. We usually approve most accounts within 24 hours, so you can start factoring invoices immediately.
Step 2. Submit your invoices
Once your account is approved, you can start sending us the invoices you want to factor. You can send it individually or in batches, whichever you find more convenient.
We can factor a single invoice or hundreds as long as they are eligible. This leads us to the next step.
Step 3. Verification
After we receive the invoices you want to factor, we will proceed to verify each one. Our verification process varies, depending on the industry you’re in.
For example, if you’re factoring a medical receivables, we will verify the accuracy of your billing data. We can also verify clearinghouse results.
Overall, we can factor and verify various invoices from healthcare, transportation, staffing, contractors, and even government vendors.
Step 4. Receive your funds
As with approving accounts, we can verify most invoices within the same day. This means you’ll receive your much-needed funds within 24 hours. We will send the invoice advances to your nominated bank account.
Benefits of using invoice factoring
Not sure if business invoice factoring is right for you? Below, we talked about its benefits and how it can be a powerful tool for your growing business. Here’s how it can happen:
- Improved cash flow. Instead of waiting for weeks or months for customer payments, factoring allows you to receive a large percentage of the amount tied to your invoices. This way, you can cover daily expenses, salaries, and other financial obligations.
- Fast and predictable funding. Unlike bank loans, you can get your funds on the same day when you choose factoring. This predictability allows you to plan and create a budget without worrying about where to get the capital.
- No debt or collateral is needed. It’s important for you to understand that factoring is not a loan. Technically, you sell invoices for cash in exchange for a small fee. Also, a perfect credit score isn’t required.
- Outsourced collections. Instead of chasing payments on your own, the factoring company will collect all your factored invoices. This means that the factoring company does the waiting, not you.
- Flexible financial solution. Another good thing about invoice funding is its flexibility. You’re free to use it only when needed or if there are invoices taking longer than usual to get paid. Aside from that, you can choose to factor invoices from slow-paying customers and retain the rest on your collections team.
Invoice Factoring Requirements
Whether it’s large or small business invoice factoring, there are some requirements you need to fulfill. For the most part, a factoring company will ask you for the following:
- Invoices from creditworthy clients. As we’ve mentioned earlier, factoring companies like us don’t require a good credit score from you. Instead, we check your customer’s creditworthiness. This is to guarantee that they will pay the factored invoice and we won’t have to take recourse.
- Clear invoices. Next, we need your invoices to be accurate and free from any liens that you’re not willing to remove. If there are any disputes or discrepancies, our team will send the invoice back to you for fixing.
- No tax liens or legal issues. It’s important that the invoices you will factor don’t have any legal issues or outstanding tax liens tied to them. All these will have an impact on collections, which factoring companies try to avoid.
Understanding Invoice Factoring Fees
Now, you’re probably asking, how much does invoice factoring cost? In general, factoring fees vary since factoring companies tend to use different pricing models.
With Factoring Express, you’ll enjoy rates as low as 1.99% for each invoice or batch of ARs you’ll factor. We offer a fixed rate, so you’ll have full control of your spending.
Above all, we don’t charge termination fees, hidden charges, or dormancy penalties. You can also cancel our service anytime and call us back when you need to factor new invoices. It’s also flexible and hassle-free, so funding will be one less thing for you to worry about.
Are there risks in factoring invoices?
Overall, factoring is a very accessible and convenient financing method. Also, it won’t be listed as a liability since it’s not a form of loan or credit line.
But just like any financial service, it comes with certain risks that are highly manageable. Before you start factoring, you should be aware of the following:
- Client Relationship. Since the factoring company will take over the collections process, it can affect your relationship with your customers. It’s important that you choose a reliable factor with a good collection approach. This way, your customers will not be turned off by the involvement of a third-party company.
- Possibility of recourse. Depending on what’s included in your contract, a recourse clause may apply if your customers don’t pay. This means that the company will charge you back for the amount they advanced. It will then be written as a liability on your books. The good thing is that factoring companies often run a rigorous credit check on your customer before factoring the invoice.
- Potential restrictions. Each factoring company has a set of requirements on what invoices you can factor. This can include the industry type, your customer’s location, or other contract terms. This could possibly limit what invoices you can get advance payments for.
- Disputes can complicate the process. If there are disputes or discrepancies on your invoice, it can complicate the factoring process. This is why you should always ensure that every invoice is accurate and clear before you submit it to a factoring company.
How to Choose the Right Invoice Factoring Company
Your choice of factoring company will affect how well factoring will work for your business. If you’re scouting for options, you should always look for the following:
- Excellent reputation. First, you should choose a factor with a solid reputation in the industry. A company with years of experience is often a good choice. You should also look for client reviews to get a firsthand idea of how good their financial services are.
- Industry expertise. It’s best to look for a factor that specializes or has experience factoring invoices in your industry. For example, if you’re a healthcare business factoring medical receivables, you’ll need a HIPAA-compliant factoring company. The same goes if you’re factoring government receivables and others with strict regulations.
- Reliable customer service. It’s also important that the factoring company has reliable customer support. This way, you have someone to call in case you have issues with your factored invoices.
- Transparent factoring terms. You should choose a company with transparent and clear terms and conditions. Also, make sure that their factoring model and pricing align with your business needs. You should also pay close attention to contract length, termination clauses, and any hidden costs.
- Opt for flexibility. A factoring company that offers flexibility is always a good option. Choose one that doesn’t have long-term contracts or minimums. This way, you can factor only the invoices that you prefer.
- Additional services. Aside from factoring, it’s also a good thing if the company offers related services. For example, if you have a trucking business, you can have one company to factor your trucking invoices and manage your trucking accounting needs.
Tips for Successful Invoice Factoring
Are you trying invoices factoring for the first time? To reduce the risk of disputes, recourse, or any other problems, you should keep the following in mind:
- Observe accurate invoicing practices. Everything starts and ends on your invoice. This is why you should ensure that it’s accurate and error-free before submitting it for factoring. This way, you can receive the funds quickly and without any problems.
- Monitor your client’s payment history. You should also check which customers are slow-paying since they are the best candidates for invoice factoring.
- Negotiate your terms. Factoring companies can offer you custom terms based on your needs, factoring frequency, and the size of your invoices. You can also negotiate better fees, especially if you’re planning to use their service regularly.
- Communicate with your factor. You should also maintain an open line of communication with your chosen factoring company. This way, you’ll be alerted in case there are issues with your invoices.
Alternative Options to Invoice Factoring
Invoice factoring is just one of the many financial solutions that you can explore for your business. So far, it’s also less risky, more convenient, and more accessible than other options you have.
But in case you want to know how it compares with other financial services, we discussed a quick rundown here. See if any of these work for your business better than factoring:
What is invoice financing? Also known as invoice discounting, it’s quite similar to factoring, but you’re still responsible for collections. When you get an invoice financed, you’re using your outstanding invoices as collateral to get a loan from a lender. The biggest downside here is that invoice financing for small businesses or large companies is still a form of loan.
Many businesses often go the traditional way of securing a bank loan when they need funding. This can work for your business, but you should know that bank loans have interest rates. Aside from that, it may take weeks to get approved unlike factoring where you receive the funds within 24 hours. Also, you’ll need collateral and a ton of paperwork.
Ready to try invoice factoring?
Invoice factoring can be an effective solution in improving your business cash flow. Unlike loans, it doesn’t incur interest rates and the approval process is very straightforward. Above all, you’ll get your much-needed capital in as little as 24 hours.
So if you’re ready to try this for your business, don’t hesitate to call us at Factoring Express. Our team will walk you through the entire process, so you can start factoring and receiving funds right away.