Invoice factoring companies offer instant funds for a short term for companies that cannot obtain conventional bank loans. For a company to receive funding from a traditional bank, you must have been in business for two years and have evidence of profit. Besides, banks will peg their loans on assets that are tangible such as inventory, machinery, real estate and equipment.
On the contrary, companies offering invoice factoring service are less restrictive. Thus, when factoring, which basically means selling invoices, you do not incur debt hence you do not have to make any monthly payments.
Even better, factoring lets you control cash flow as you can determine when to factor and how much. Furthermore, whether a company is young, growing or even bankrupt they are legible for an invoice factoring account. For this reason, factoring is a viable source of funding.
How it Works
Companies that offer factoring services will usually acquire your accounts freight bills or receivable at a much discounted rate before issuing you a lump sum payment. Generally, you will sell your company’s invoices or accounts receivable at a lower value in exchange for quick cash. This means you will not have to wait for the usual 30 – 45 days for the invoice to be paid.
Once you deliver your service/product and subsequently generate an invoice, factoring companies may provide you money in under 24 hours. Thus, a factoring company can help in speeding up your cash flow. An influx of cash will definitely help you meet financial obligations without straining. For instance, you may use the money to boost your working capital, pay taxes or bills, pay for supplies and equipment or simply take advantage of early payment discounts that vendors are offering you.
Generally, you can receive up to 80 percent of the value of your invoice through factoring. They may then issue the remaining after deducting the factoring fees after the client has forwarded the payment to them. When it comes to the factoring fees, several factors are taken to account that include the creditworthiness of your customer, invoice size and number, average terms and the factoring volume.
A factoring company will usually structure their fees in different ways. However, the rate that you will end up paying will usually work out to be between 3 and 5 percent of the value of your invoice.
You need to know that financing fees usually fluctuates depending on the performance and creditworthiness of your individual receivables. Where the risk involved is extremely low, the fee may go as low as 1 percent of the total amount of the invoice.
You will do well to ensure that you get as much information as possible from the factor before you make a commitment on paper. This will help you understand your obligations clearly and what you can expect from them. This way, you are also able to consider that value of factoring to your business and whether you should opt for a bank loan after all. You can also speak to a factoring expert to guide you through.