It’s no secret that one of the most difficult parts of running a business is getting paid for the goods and services you provide. While this holds true for nearly every business model, B2B businesses are especially vulnerable to a lack of liquid assets because clients have not paid their invoices yet. After all, most businesses provide a net of at least 30 days to pay invoices, and your clients want to generate as much return as they can before they pay their bills.
If your business is having problems growing and expanding at the rate you want because of issues with cashflow, then there are several solutions you can consider. Many businesses look into lines of credit and other financial tools that provide the cash they need. However, these solutions create risks, as you need to be able to pay your bills on time for the solution to continue to function like you need it. Moreover, many of these solutions come with high interest rates that can cause your monthly expenses to climb. Thankfully, there’s a way you can get your cash faster without resorting to high-interest finance mechanisms: invoice factoring.
What is Invoice Factoring?
Invoice factoring, also known as receivables factoring, is the process of selling your account receivables to a company. The company pays you a flat percentage of the invoices value up front, and then pays the rest minus a discount fee when your client or customer pays their invoice. As a result, you can get paid for your invoices immediately and don’t have to wait to get the liquid assets your company needs to grow.
Additionally, invoice factoring does not establish any debt, which makes it ideal for troubled balance sheets. Essentially, you’re selling the right to collect money for the goods or services your clients and customers ordered already.
What Happens to a Factored Invoice?
When you use invoice factoring you still do business as you normally would. When you send your client an invoice you can submit it to your factoring service and get paid immediately. Your client then sends the payment for the invoice to your factoring service. After the factoring firm receives your client’s payment they send you the rest of the money minus their discount fee. Therefore, invoice factoring doesn’t add any complexity to your business or accounting procedures. Moreover, there’s no debt to worry about. Factoring companies give approval based on your client’s credit rating, which makes it ideal for new businesses, startups, and businesses that have had credit issues in the past.
Invoice Factoring Rates
Invoice factoring companies set their rates individually. Therefore, it’s a good idea to check out different invoice factoring reviews so you can find the company that offers the best deal for your particular situation. However, there are some aspects of invoice factoring that remain fairly consistent throughout the industry. You should use these standards as guidelines to determine if the factoring company you’re considering is offering a good deal.
It’s also important to note that some factoring services specialize in particular industries. Industry specific factoring services are a good choice as most of these companies offer additional services tailored to your industry’s needs.
Generally, invoice factoring companies will pay at least 80% of the invoice upon submission. This is the minimum upfront factoring payment you should look for. After that, the company charges what is known as a discount fee. A discount fee works much like interest rates on a loan, and is how the factoring company makes money.
Every company determines their discount fee differently. Some of the common factors companies use to determine the discount rate include your client’s credit rating, your industry, the terms you offer on your invoices, how many invoices you factor with the factoring service, and the value of the invoices you factor.
Broadly speaking, discount fees range from 1-5%. The lower the discount fee, the more of your money you’ll get when your client pays their invoice. As a result, the best invoice factoring companies are those that pay the highest percentage on the initial invoice and offer the lowest discount fee. This arrangement allows you to keep the greatest amount of the money you charge while giving you more money up front to grow your business.
It’s important to note that different companies have different policies and services when it comes to factoring invoices. Some companies might have a minimum number or value of invoices you need to factor every month, some require that you factor all of your invoices, and others provide factoring on a case-by-case basis.
How do You Start Factoring Invoices?
Setting up an invoice factoring relationship is relatively easy and straightforward. Once you’ve researched invoice factoring companies, read invoice factoring reviews, and found a company that offers a service that fits your needs you simply apply to factor invoices with them.
Most factoring companies will run a credit check on your clients and give you approval within 24 hours. After that, you can submit invoices for factoring. Most factoring services pay out on an invoice the same business day its submitted.
Invoice Factoring Benefits
There are several benefits of invoice factoring no matter what kind of business you run. The first, and most obvious benefit, is that you don’t have to wait to get paid for your services. As a result, you’ll have the money you need to take advantage of opportunities, take risks, cover payroll, buy new equipment, and generally expand your business.
Another benefit of invoice factoring is that it provides you with liquid capital without taking out any debt or lines of credit. This can be important for industries that have complicated tax laws or that have constraints on how much debt they can take on.
Invoice factoring also allows you to simplify your accounting process. As a result, many smaller companies use invoice factoring to take the place of an accounts receivable department. The factoring service takes on the job of making sure your invoices get paid, while you focus on growing and developing your core business processes.
Specific industries can reap benefits from invoice factoring as well. For example, trucking and freight industries have specific invoice factoring services that also provide other essential business needs, like fleet fuel cards and insurance. Using these factoring firms allows you to take advantage of economies of scale, getting better rates on the things that your business needs. Additionally, by offering these services, these companies simplify your business process and keep all of your needs in one easy-to-manage relationship.
Small Business Invoice Factoring
Some companies might wonder if they’re too small for invoice factoring. However, there are factoring services for even the smallest of businesses. As a small business, it can be hard to grow. After all, adding elements to your business to do things like track accounts receivables, manage your payments, and other tasks that form the scaffolding for growth but don’t actually increase your business’s productivity or fuel your core business process can be a drain on any small business’s capital. Moreover, adding these business elements is a huge risk, as you need to hire employees, train them, and then manage your remaining capital so you can continue to grow and justify those new business services. Invoice factoring simplifies these processes by consolidating and expediting your revenue streams.
Additionally, small businesses stand to benefit tremendously by the rapid access to liquid capital that invoice factoring produces. One of the hardest things about running a small business is the boom-to-bust swing that can take place regarding your cash on hand. No one wants to fret over whether or not they’ll make payroll because a big client is waiting to pay until the last possible minute. Factoring provides the predictability and stability that helps your small business plan to grow.
Enterprise Invoice Factoring
Enterprise companies can also benefit from invoice factoring. Many invoice factoring firms specialize in working with enterprise operations, and they can fund even the largest invoices. As a result, you can be confident that your company has the cash on hand it needs to facilitate all of its operations without resorting to lines of credit or other fund-raising strategies. Many firms resort to selling stock or seeking large loans to cover expected operating expenses. Invoice factoring means you don’t have to go through these tedious processes to get the capital your department or enterprise company needs.
Moreover, invoice factoring firms often give preferential rates to enterprise operations. The sheer amount of revenue and transactions that an enterprise firm does means that invoice factoring services are willing to give incredibly favorable terms to secure your business. If you compare the terms on invoice factoring to a financial product like revolving debt from credit cards, you’ll see that invoice factoring lets your company keep more of the money its making, padding profit margins and helping with your overall earnings. Some companies have found that, by putting fewer expenses on credit cards, invoice factoring substantially lowered their cost of doing business.
Compare Invoice Factoring Companies
Any business owner or manager will tell you that it’s important to do research before making any major decisions regarding your business. Invoice factoring is no different. We’ll outline the things that you should look for when comparing invoice factoring companies so that you can find the best invoice factoring company for your business and its unique needs.
The first thing you should compare when you’re choosing between different invoice factoring services is the percentage of the invoice that they pay up front. The greater the percentage of the invoice the service pays up front, the more money you’ll have on hand do grow your business.
Generally, companies offer at least 75% of the invoice as an upfront payment. If the company offers less than 75%, then you should look elsewhere for your factoring needs. Some companies are willing to offer 90-95% of the invoice’s value upfront. These are tremendous opportunities as they dramatically lower the cost of money for your business.
The next element you should evaluate when comparing invoice factoring companies is the discount rate they offer. Remember, discount rates work like interest rates in the sense that the lower the rate, the cheaper the service is for you. Therefore, you should find the sweet spot between the lowest discount rate and the highest initial payment.
One thing that you need to check is how the company calculates their discount rate. Some invoice factoring firms use a compound interest model, and others use simple interest. Therefore, don’t immediately go for the lowest number you see. If you have any questions you should call the company and ask for more information about how their services work for you. Be prepared to pose hypothetical examples of invoice values and payment scenarios. This will give you a better idea of how the company in question will handle your invoices.
Transparency is an important element to consider when comparing invoice factoring companies. Ask about hidden fees and what kinds of rates those fees operate at. Some companies have been known to offer extremely generous payment and discount rate terms, but then charge a ton of hidden fees that aren’t disclosed until you’re signing the contract, or worse, until you get your first statement. While many invoice factoring companies don’t list these fees on their website, you should definitely stay away from those that won’t discuss or disclose them over the phone.
Finally, you should consider what kinds of perks and bonus services the different options offer. Many services offer things like free credit checks on your clients, accounting services, client portals, and more. Additionally, industry-specific factoring companies will offer things like fleet fuel cards, insurance, purchase order funding, and other valuable options. Try to determine if these additional services create more value for one invoice factoring company over another, even if the rates and terms on the factoring service itself are different.
As you can see, invoice factoring has a lot to offer businesses large and small. Make sure you do your research, and pick an invoice factoring company that works for your unique business and business needs. After all, it’s your money, you should be able to get it when you need it instead of having to wait.