Does Invoice Factoring Make Sense for My Business?
Can Factoring make the Pain of Cash Flow Problems Disappear?
Own Your Cash Flow with Bankers Factoring
When Unpaid Invoices lead to cash flow trouble, Invoice factoring can be a quick and easy solution
Factoring invoices is a creative financing tool for start-ups, rapid growth companies, new entrepreneurs, and small businesses to finance their business struggling with cash flow. A/R Factoring companies buy unpaid invoices at a discount and provide immediate cash to small businesses. When factoring companies buy invoices, they take over the receivable collection process.
The immediate funds help small businesses and entrepreneurs pay for payroll, inventory purchases, marketing campaigns, and other significant expenses to grow a business. If you are experiencing cash flow problems, how do you know if invoice factoring is the solution you need? We talk about the pros and cons of invoice factoring.
Why do businesses sell their invoices?
Businesses often have to wait for the payment after they provide products and services to their customers. Payment terms can range from 30, 60, to even 90-day terms for payment which is why companies turn to invoice factoring. These delays in receiving payments put businesses in a cash shortage where they may not meet payroll requirements, lease obligations, taxes, or purchase new inventory.
For example, say your business is advanced 90% of your $100,000 account receivables (AR) from the factoring company. Then within days, you will have $90,000 of cash or liquidity to fund operations or growth plans. You can turn all your outstanding invoices into ready cash in your bank account. Invoice factoring can turn a negative working capital into positive working capital.
The A/R factoring company will collect and receive payment from your customer, then pay you the remaining balance, less their fees. Fees can range from less than 1 to 2.9% per 30-days, depending on the situation.
8 Advantages of Using a Factoring Company
- Immediate cash funding
The main benefit of invoice or A/R factoring is quicker 2-5 day funding than a traditional loan from lenders such as banks or the Small Business Administration (SBA). A business loan can take a minimum of 30 days. The business selling their invoices will lose a portion of their A/R to fees from the factoring company but can have fresh capital in just a few days. Selling invoices or invoice factoring is an efficient tool for growing companies that need creative financing.
- The process of invoice factoring is relatively simple
Some small businesses or growing companies, on paper, may not have the best credit rating. Poor credit can be due to covenants with current loans, insufficient financial statements, or recent bankruptcies. The inability to secure traditional financing can be resolved through invoice factoring.
If your company has invoices with a commercial client that has a strong credit rating, then invoice factoring is a logical solution. Your company can secure cash efficiently by selling your open invoices based on your customer’s credit rating and track record of paying. Invoicing factoring can be completed more quickly than traditional financing. Overall invoice factoring is a more efficient option for smaller or growing companies.
- Factoring is for companies of all sizes and scale
Suppose you need working capital to cover operating expenses while your business waits for customers to pay their invoices. In that case, invoice factoring is an option. For start-ups or rapid growth companies, factoring does not require giving up equity in your company. For small businesses with annual revenue of $100,000, factoring invoices is a more probable funding source than traditional lenders. More importantly, factoring is not specific to any industry; all companies can benefit from selling their invoices.
- Allows growing companies to offer Credit Terms & Longer Payment Terms
Many more considerable trade or service organizations often leverage their position with 60 or 90-day payment terms. For a growing or emerging business, offering longer payment terms enables it to grow, acquire new customers, and retain current slow-paying customers. Invoice factoring allows companies not to give up other assets as collateral aside from the invoices.
- Scales as you grow-Easy to Increase Your factoring line
As your invoice balance grows and the creditworthiness of your clients remains strong, the factoring firm can increase your lines and access to quick cash. Factoring works to alleviate cash flow problems faster than a bank. It is also not credit score-driven.
Invoice factoring pricing goes down at Bankers Factoring as you grow.
Invoice factoring is great for rapid growth or turnaround situations with aggressive plans and necessary financing requirements to meet goals and objectives. We have had clients go from $100,000 to $1,000,000 per month in factoring in less than a year.
- Factor can take the Credit Risk-Eliminate Bad Debt
With a Non-Recourse Factoring Company like Bankers Factoring, we take the credit risk if your client files bankruptcy, goes insolvent, or because of financial difficulties, their payments become protractedly slower. Of course, you are still in charge of meeting the quality standards your clients expect.
- You don’t have to give up Ownership or Equity
Factoring is the sale of your company’s most liquid asset, your ongoing accounts receivable that you are constantly creating. You don’t have to sell precious equity and dilute your ownership stake when you factor your invoices.
- Your Company gets a Free Credit Department
What do credit insurance and a credit manager cost per year? $100,000 or more? Included in Bankers Factoring fees are your free credit manager and credit protection on your approved customers. We give you peace of mind.
Disadvantages of Using an A/R Factoring Company
- Costs of factoring
Factoring can cost more than traditional lending sources such as bank loans. The Factoring Rate or Monthly fees for invoice factoring can be anywhere from 1% to 2.9% at Bankers Factoring. If your business is continually selling invoices, this solution can become expensive. However, the true cost of invoice factoring vs a bank line of credit does it allow you to take on more sales so the net result is more net profit even after factoring fees.
Think of the true cost of factoring this way. You have $500,000 in open invoices to Walmart or AT&T. A bank, because of customer concentration issues or your personal credit, which will only give you a $100,000 line of credit. An amount of money that is just enough for you to go broke. Bankers Factoring will give you a $1,000,000 facility and $400,000 cash today on verified invoices. $300,000 more than any bank will.
Regardless of factoring fees or interest rates, which credit facility will allow you to grow your sales and your profits? That is the real question that Invoice Financing Answers.
- Factoring company contacts your customers
Once a company sells its invoices to the factoring company, the factor takes ownership and communicates with your customer for payment. Losing this control or this aspect of the relationship can be worrisome for business owners. However, a non-recourse factoring company like Bankers Factoring uses a light touch with your customers and the proof is that our client’s customers refer us to their other cash-strapped vendors.
- Not always a long-term solution
Factoring is an excellent tool for short-term cash shortages, launching marketing campaigns, or facilitating capital projects and growth initiatives during a few quarters or half-year. However, factoring requires time, effort, and resources from the selling company:
- The company selling invoices to prepare documentation for the factor
- There is a potential for bad debt from the factor not collecting all payments if at recourse versus non-recourse
- Invoice factoring services only solves cash flow issues, unless you use it to take supplier discounts or grow top line
How to Pick an A/R Factoring Company
Suppose you are considering invoice factoring as a financing solution for your business. In that case, it is time to find the right factoring company. When evaluating invoice factoring companies, it is vital to find a company that understands your business. Consider the following when comparing invoice factoring companies:
- Does the company have experience in my industry?
- What does their current clientele consist of?
- Does the company have a minimum or a maximum number of invoices they will fund?
- What are the factoring fees or discount rates?
- How much is the cash advance?
- How long does it take to receive funding?
- Does the company selling invoices retain control?
- What happens if customers fail to pay invoices? Or overdue invoices?
- What is the qualification process to receive funding?
- Is the invoice factoring full recourse or non-recourse?