If your company, like many others, has outstanding invoices and slow-paying customers, you don’t need to be stuck without income.?Invoice factoring — selling unpaid invoices to some factoring company in exchange for immediate cash — could be the answer to your troubles. But how exactly does invoice factoring work? The use of small business factoring services? And if so, how can you choose a good factor? Keep reading to find out!
- 1. Are my finances suffering because of slow-paying customers?
- 2. Can I afford invoice factoring?
- 3. Would an alternative financing solution are more effective?
Invoice Factoring Basics
Invoice factoring (or a / r factoring) happens when a business sells their unpaid invoices to a factoring company, for a cheap price, in exchange for immediate cash.
Factoring is generally accustomed to solve income problems caused by slow-paying customers. Rather than waiting 60, 90, or perhaps 180 days for a customer to pay for, smaller businesses sell their invoices to some factoring company (also known as a “factor”) to get the cash required to maintain business operations or undertake new projects.
But how does factoring actually work? Typically, the factoring company provides you with 85% to 95% from the invoice total upfront and hold a portion from the invoice value in reserve before the customer has paid the invoice; when the customer pays, the organization will send you the reserved money, minus a factoring fee. An ordinary factoring fee (or discount rate) ranges between 1% and 6% per month. Fees can be accrued daily, weekly, or monthly, therefore the longer your customer waits to pay for, the bigger your accrued factoring fee becomes.
Here is an illustration of exactly what a typical factoring arrangement might seem like:
You sell an invoice valued at $5,000 to a factoring company. The factoring company sends you $4,500 (90% of the invoice value) and keeps $500 on reserve. Your factoring fee is 0.6% per week. Your customer pays after 35 days (or 5 weeks), so that your fee is $180 ($30 per week). The factor deducts their fee, and sends the rest of the reserve, totaling $320, for you.
Make sense? While no one likes needing to quit a portion of their hard earned money, the immediate cash may be more than worth it.
Recourse VS Non-Recourse Factoring
Invoice factoring may seem great, but what happens if your customer doesn’t pay their invoice? Well, it depends on whether you’ve got a recourse or non-recourse factoring arrangement:
- Recourse: You are entirely accountable for re-purchasing the unpaid invoice.
- Non-recourse:?The invoice factor accounts for the unpaid invoice.
Note: Most often, non-recourse factoring only covers clients who declare bankruptcy. The factor can always hold you responsible for paying back disputed invoices.
Read?Non-Recourse Invoice Factoring: All you need to Know to explore the pros and cons of each option.
Spot Factoring VS Contract Factoring
In addition to recourse and non-recourse factoring, there’s even the choice of spot factoring or contract factoring:
- Spot Factoring:?In which you pick and choose which invoices you target an issue.
- Contract Factoring:?In which you agree to a long-term contract to market all (or most) of the invoices to some factor.
There are pros and cons to every option. Spot factoring enforces no long-term contracts or minimum volumes?but does often involve higher factoring fees. With contract factoring, you’re locked into a factoring agreement and you often have to satisfy a minimum monthly volume, however, you typically have lower factoring fees. Read?Spot Factoring: Is Single Invoice Factoring Right For Your Business? to find out more.
Invoice Financing VS Invoice Factoring
Invoice factoring isn’t the only method to leverage your unpaid invoices to obtain funding. There’s also invoice financing.
Invoice financing is technically a catch-all term for just about any form of financing involving invoices. There’s two main kinds of invoice financing: selling your invoices (factoring invoices) or making use of your invoices as collateral for securing a loan. Usually, whenever you hear the term “invoice financing,” individuals are talking about the latter. (You may hear the term accounts receivable financing instead.)
With invoice financing, rather than selling your invoices, you’ll make use of your accounts receivable (unpaid invoices) as collateral to be eligible for a an asset-backed line of credit. With an asset-backed line of credit, a financer will grant you a credit facility based on the value of your unpaid invoices.
One of the other major differences between invoice financing and invoice factoring is that with invoice financing you are in charge of collecting the payments from your customers. Conversely, a bill factor has officially purchased the invoice, so?they are responsible for collecting the customer payment — not you. While some factors may offer non-notification factoring invoices, most notify your customers that the third-party factor is collecting their debts.
Invoice factoring is becoming increasingly more common and is now considered standard for a lot of industries; however, if you aren’t confident with an issue connecting directly with your customers and want additional control over your invoicing, invoice financing may be a better solution for the business.
If you need to begin to see the difference between invoice financing and factoring invoices when it comes to borrower requirements, see the chart below. Fundbox is one of our highest-rated invoice financers and BlueVine is one of our top invoice factors. Here’s the way they compare:
Here is when?the top invoice financer and factor compare when it comes to rates and fees:
Apply with Fundbox
Apply with BlueVine
Note that borrower requirements and rates will vary with each invoicing financing and factoring invoices company.
Are You Entitled to Factoring invoices?
Now you know the basics of invoice factoring and how it differs from invoice financing, the real real question is: how can you tell if you be eligible for a invoice factoring? If?you take a B2B or B2G business and you invoice your visitors, odds are you’re a good candidate for factoring invoices.
Unlike every other type of business financing, your business’s revenue and creditworthiness aren’t especially large considerations when determining eligibility. Invoice factors are more concerned with the creditworthiness of the customers?since your customers are the ones actually paying your bills.
This makes invoice factoring a potential option even if:
- You possess a new business with no financial track record
- You don’t make very much money
- You have poor personal credit
While these traits allow it to be difficult to qualify for traditional loans, you’ll probably still qualify for factoring invoices based on the status of the a / r.
Is Factoring invoices Right For My company?
You may qualify for invoice factoring, but should you use a factoring service? There are a lot of pros to factoring your invoices, but it’s not a perfect fit for those businesses. To find out whether factoring suits your situation, ask yourself these three questions:
1. Are my finances suffering because of slow-paying customers?
Slow-paying customers can impact many regions of your company. If you aren’t paid for your work until months after you have completed the job, you may have trouble managing business expenses, purchasing inventory and supplies, paying employees, or covering overhead costs. If this sounds like the situation, invoice factoring companies could be a simple way to make sure that you have the working capital you have to run your company.
However, invoice factoring is not always cheap, which is why you need to think about this next question.
2. Can I afford factoring invoices?
In general, factoring fees (or special discounts) vary from about 1% – 6% of the invoice value monthly, based on your specific factoring arrangement. Let’s say you sell a bill from a particularly slow-paying client, and you have a higher factoring rate, you can find yourself paying around 18% (or higher) of the invoice value in fees for that chance to get your money sooner.
Many invoice factors also charge extra fees for factoring services. Business owners may be charged:
- Money transfer fees
- Servicing fees
- Monthly minimums
- Renewal fees
These fees can begin accumulated quickly with time. Head over to our explanation of factoring rates and costs to discover special discounts along with other commonly charged fees.
All that said, your fees will depend on numerous components, including the factoring company you’re working with, the creditworthiness of your customers, the number and size the invoices you need to sell, the your business is in, along with other considerations. You’ll have to review your options and decide whether the cost is worth it for your business.
3. Would an alternative financing solution are more effective?
Even if you decide that you’ll need a financial solution, invoice factors probably aren’t your only option. Now, more than ever before, businesses have a plethora of financial solutions available. While invoice factoring might seem like the perfect solution to your money flow problems, the next loan products might be a better fit:
Asset-Backed Lines Of Credit
As we mentioned earlier, these lines of credit could be backed by unpaid invoices or (occasionally) assets like inventory or any other receivables. The number you are able to borrow depends on the value of your collateral. Asset-backed lines of credit work similarly to invoice factoring but might offer more flexibility somewhat. These credit lines also tend to have lower rates than unsecured financing, so you may be eligible for a low rates and costs in comparison to other available choices.
Revolving Lines Of Credit
With a revolving line of credit, the number you are able to borrow replenishes while you repay your debts. Although some revolving credit lines are backed by collateral, some simply require you to sign an individual guarantee and/or pledge general business assets via a blanket lien. Using this type of financing, you’ll always have money available when you need it. And since you repay weekly or monthly, you don’t have to worry about getting fined since your customers forgot to pay their bills.
Head over to our article on business lines of credit to explore this type of financing, or scan?their list in our favorite lines of credit if you’re wondering about your options.
Business Credit Cards
Business charge cards can be useful for business people who require cash for business expenses. You can put many purchases on charge cards and repay them on a timetable that works for you.
However — particularly if you tend to carry a balance — you might want to consider other available choices because credit cards have notoriously high rates and costs. If you’re searching for a business credit card, check out a lot of our favorite business charge cards.
Compare best three Chase business credit cards at a glance:
Small Business Loan
If you simply need funds one time, or you require a large sum of money, a small business loan might be a safe bet.
Some lenders have long application processes, but many can let you realize if you’re eligible inside a very small amount of time period, without having affected your credit score. Most small company loans are available in the form of quick installment loans or short-term loans. Small company loans can be used as numerous purposes, such as capital, payroll, inventory purchasing, and much more. Check out these top-rated small company financial institutions to ascertain if you qualify for this kind of funding.
If factoring invoices still seems like the best financing choice for your business, great! Keep reading to learn how to pick the perfect invoice factor for the business.
How To find the Right Invoice Factor
Now that you’ve determined factoring invoices fits your needs, the next thing is choosing an invoice factoring service. But exactly how do you know which invoice factoring company is best for your online business? The are many points to consider when selecting an invoice factor, including:
- The factoring fee
- Any additional fees
- Whether the factor is recourse vs. non-recourse
- Whether the factor is notification vs. non-notification
- Whether the factor requires a long-term contract
- Which invoices you can factor
A good factoring invoices service is going to vary depending on your business’s specific needs, so take time to decide which qualities are most important for your business and discover an issue that fits those requirements. Seek information and perform some looking around to find the best rates and fees available to you. Take a look at our top factoring invoices providers to get started.
Now guess what happens factoring invoices is, how it’s used, and the way to tell if it’s right for you.
If factoring invoices sounds like a good solution for the business, great! Factoring invoices might help solve the issue of slow-paying customers and alleviate income troubles. To obtain the right invoice factor for your business, check out the high invoice factoring services and begin managing your money flow today.
Merchant Maverick’s comprehensive reviews of factoring invoices services also provide honest?and thorough assessments of probably the most popular invoice factoring services available.
If after reading this informative article, you’re still not sure if factoring invoices fits your needs, the following resources can provide additional information about invoice factoring and may make your mind up easier:
- A Basic Summary of Invoice Factoring
- Understanding Invoice Factoring Rates & Fees
- Spot Factoring vs. Invoice Factoring
If you know that you need a income solution but invoice factoring doesn’t sound like the right business move, don’t worry. We’re here to help! There are plenty of different ways to enhance income along with other business funding options available. Check out our comprehensive small business loans reviews?or let’s discover the perfect loan for you.
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