If your company provides services to other companies, you are likely familiar with the process of issuing invoices and waiting for payments. Although invoices typically have 30, 60, or even 90 day payment deadlines, this can create problems for your business Cash in circulation.
This is where invoice factoring companies come in. These companies buy unpaid invoices at a discount to help your business get the funds it needs faster. Learn more about factoring companies and how to choose the best one for your needs.
What is a factoring company?
A factoring company is a company that Invoice factoring Services that involve buying unpaid bills from a company at a discount. The company will prepay a percentage of the invoice, say 85%, within a few days, and the factoring company will take responsibility for the invoice and the payment process. Once your customer pays their invoice (directly to the factoring company) you will receive the remainder of the money owed to your company, minus the factoring company’s fees.
Why are companies selling their invoices to factoring companies? Essentially, to bridge the gap between completing a service and the due date for payment for that service. While the company is losing a little money to the factoring company, it may be worthwhile to fill in a liquidity gap. Factoring companies tend to move much faster than more traditional lenders like banks. So if you need cash fast, they can offer efficient solutions.
This is how factoring companies work
What does the cooperation with a factoring company look like? If you sell $ 20,000 invoices to a factoring company, they may agree to buy them for $ 19,600 with a 2% factoring fee of $ 400. The factoring company usually does not give you the full amount upfront. Instead, you might receive 85% upfront – in this case, $ 16,660 – and once the bills are paid, you will receive the balance of $ 2,940.
To make money, factoring companies charge factoring fees (sometimes called discount rates). These fees are typically between 1% and 5% of the total bill. The factoring fee depends on the invoice value, the sales volume of your company, the creditworthiness of the customer and whether the factor is “regress” or “non-recourse”. It is important to note that if the factor is recourse, you may have to repay the factoring company if your customer fails to pay their bill.
Advantages and disadvantages of factoring companies
Factoring companies have both advantages and disadvantages. The main advantages are in the acceleration of the cash flow. If you need working capital to fill a liquidity gap while waiting for customers to pay their bills, an invoice factoring company can help. If some of your best customers are happy with longer payment terms, then you can keep your payment terms while keeping your business running smoothly.
On the other hand, working with an invoice factoring company can be expensive because of their fees. You also lose a little bit of control over your customer relationships as invoice factoring companies take ownership of your invoices and how they are paid.
How to choose a factoring company
If invoice factoring sounds like the right financing solution for your company, then the next step is to find the best factoring company for your needs. As with any type of Small business finance, compare options to ensure you get the best terms and lowest fees.
When comparing invoice factoring companies, consider the following:
Types of companies they work with
It helps to work with a factoring company that is familiar with your industry and business model. If it already works with similar companies, this experience can help ensure a smooth factoring process. Some questions to ask yourself are:
What size of company does it usually work with?
Which industries does it specialize in?
Do companies have to meet certain criteria, e.g. B. the operating time or a certain amount due to be able to work with it?
This is what your factoring process looks like
You also want to better understand what the collaboration with each factoring company looks like and what kind of service you can expect. Find answers to these questions:
Is there a maximum (or minimum) number of invoices the company will fund?
Will it manage all of your accounts receivable or will you be in control and decide which invoices to sell?
How soon do you get the money?
What if a customer doesn’t pay their bill?
It is important to understand the difference between factoring and invoice. to understand Invoice Financingas you may come across both types of companies in your search for cash flow solutions. In invoice financing, a company uses unpaid invoices as collateral when pursuing a cash advance. In this case, the company continues to be responsible for collecting payments, while with invoice factoring you pass this responsibility on to the factoring company.
Fees and Other Requirements
One of the most important details to consider is how much each factoring company charges for their services. It will also likely have requirements that your company must meet in order to qualify for funding. Find the answers on:
What is the factoring fee or the discount rate?
What percentage of each invoice do you receive as a first advance?
Does the company need a personal guarantee?
What kind of documents (e.g. tax returns or annual financial statements) does the company need?