How Invoice Factoring Save Companies When They’re Short on Cash. In various industries, it is quite common for a business to receive a payment days after its services or products have been delivered to the end client. In some cases, this duration falls across the 30-day range. In select segments, it can go over 90-days from the date of services rendered.
If your business operates in such a sector, you may have firsthand experience of the issues that a shortfall of cash may bring to the table. From processing payroll disbursement to paying utility bills, even normal operational expenses can seem like a massive feat.
With invoice factoring, your business can steer clear of the problems caused by a shortage of funds. In addition to footing the bill for your company’s day to day expenses, this financing method can also help you in the case of emergencies.
To see how invoice factoring works and how it can help a business resolve its cash shortage, here’s a lowdown on the method and its key benefits.
What is Invoice Factoring?
Invoice factoring save companies that allows you to sell your unpaid invoices for cash value. This lets you recover the payment you are owed against your accounts receivable (AR), but without pressuring the respective client to pay up before the due date.
Invoice factoring save companies which is available through select providers called “factors” who specialize in this financing product. These factors or factoring companies buy invoices from businesses and pay their agreed cash value right away. But in order to recover their investment, they wait for the actual client to settle the invoice on its due date. In return for this arrangement, factors often charge a set fee from the company that is selling its AR.
How Much Amount Can You Receive Through Factoring?
Through invoice factoring, you can immediately receive a large portion of the amount that is due on your AR. Many factors let you obtain up to 90 of the total value of your invoices, while others usually draw the line at up to 80 percent of the total amount due.
This amount is paid upfront at the time of factoring. When the end client settles the invoice by their respective due date and the payment goes directly to the factor, your company can receive its remaining funds on the AR. With that being said, the one-time fee of the factor remains in place in all scenarios. Similar to the upfront amount, the factoring fee can also vary on a case to case basis.
Unpaid Invoices Can Create a Number of Problems
When invoices are not paid shortly after the delivery of products or services, they can create a number of issues for the respective business. In addition to funding the order’s expenses out of pocket, the company also has to cover costs such as payroll by itself. This process continues until the business receives the amount it is owed against the invoice.
If your business tends to go through the same process against its accounts receivable, then you may have firsthand experience of these problems. Apart from disrupting your finances, this can also stop you from your plans to expand or scale your business. In case you don’t have sufficient funds in your business account to fall back on as a safety net, this delay between delivery and payments can threaten the ongoing operations of your company.
What Issues Does Invoice Factoring Solve?
By getting immediate funds against invoices that would get paid in a few weeks to a few months, it gets easier to keep your operations afloat. Since the factoring process is delivered against a set fee, it also remains highly affordable as compared to other financing avenues. That is why it stands out as a popular way to cover your operational expenses when you are short of cash.
Some of the most common problems resolved through invoice factoring who save companies include the following.
- Utility expenses.
- Payroll shortfalls.
- Inventory management.
- Equipment maintenance.
- Insurance payments.
- Investment opportunities.
- Order fulfillment.
If your business is facing any of these issues while having accounts receivable in place, invoice factoring can rise to the occasion. In addition to supporting you with covering your operational expenses, the method can also help you nab viable growth opportunities that would be inaccessible without additional capital.
For instance, if you run a freight management firm and have the chance to obtain a large contract, it is important that you have the right fleet and optimal maintenance in place. But since these actions may require sufficient funding, you may not be able to access them if your revenue is stuck between unpaid invoices. By optimizing your accounts receivable, you can benefit from such chances to grow your business.
What Kind of Businesses Factor Their Invoices?
Due to its easy financing mechanism, invoice factoring is available across a variety of business sectors. But it is most sought after in those industries that face lengthy payment timelines against their invoices. With a general invoice settlement duration of 30-90 days, logistics management and freight management industries stand apart as prime examples of this phenomenon.
With that being said, invoice factoring can help other types of businesses as well. If your business has accounts receivable with proper documentation to uphold the contract, you might be eligible for factoring your invoices. You can reach out to a reliable factor to determine your ability to sell your invoices.
Factoring is Different From Conventional Loans
It is important to remember that factoring your invoices is different from typical loans. Where conventional products such as payday loans come with high interest rates and short repayment timelines, invoice factoring remains more affordable and presents relaxed payment terms.
When you take out a payday loan, you need to typically pay it off within a month if you want to steer clear of high interest rates. If you are unable to achieve that feat, you are often hit with a significant interest amount by the lender. On the other hand, taking out a business loan requires you to keep repaying your loan amount with monthly installments for a set period of time. This builds a high interest rate over time, with the option for early payoff often bearing costly prepayment penalties.
In contrast, opting for a factoring company gives you access to a flat fee against the service. The ability to tie your payment to your accounts receivable also sets you free from paying off the amount earlier than you can afford. Instead, the factor company patiently waits until the invoice due date for the respective client to settle their payment.
Apart from the fee and repayment structure, the overall process to obtain the financing also remains quite different. Where some of the comparatively affordable loans can take weeks to get processed, invoice factoring applications get reviewed within a few hours of their submission.
What Do You Need to Factor Your Invoices?
The documentation requirements for invoice factoring depend on a case to case basis. In addition to your industry, these aspects are also influenced by the policies set in place by respective factoring companies. With that being said, the general requirement remains simple to follow and steers clear of complexities in.
For instance, when it comes to freight companies, the documentations required may include the specific bill of lading (BOL), articles of incorporation, tax information, and identification information. These documents are submitted with a filled-out application form, which is then processed by the factor according to its outlined timeframe. However, these requirements can be modified by specific factoring companies.
How Long Does the Factoring Process Take?
Since many businesses sell their invoices due to an immediate need for cash, the factoring process is designed to be as swift as possible. In ideal circumstances where all verified documentations are present, the confirmation process may take as little as two days.
While disbursement may take additional time, the whole payment transfer process doesn’t usually take more than two days as well. This means that if you are reaching out to a reliable factor with proper documentation, you can expect your factoring application to get processed within a couple of days. This quick processing is one of the many aspects that makes invoice factoring so popular and helpful for businesses.
Check Your Business’ Eligibility for Factoring
As mentioned above, a variety of businesses that operate on accounts receivable can benefit from invoice factoring. This means that if your business has legal and financial documentation for your unpaid invoices, you can reach out to a factor to determine your eligibility. This allows you to get personalized guidance for your case directly from industry entities.
It is also important to note that you may be able to choose between recourse factoring and non-recourse factoring. In recourse factoring, your business is held liable to return your factored amount if your client fails to settle the invoice on the due date. In non-recourse factoring, you are free from such responsibilities under select circumstances.
By keeping this information in mind, you can easily contact a credible factoring company in your industry and get instant cash against your invoices. If you take your time to understand the financial terms and contracts, you can rest assured that the arrangement remains free of any bad surprises.
When used the right way, invoice factoring can help you keep your business stay afloat in difficult situations while also allowing you to grow it through viable opportunities. As long as you make sure that you are dealing with a reputable factoring organization, you can make the most out of this mechanism without running into any problems.