Factoring is not new although mostly it’s becoming more and more prominent due to the rise of working capital needs and lack of access to liquid operating capital. As such, this is a convenient and reliable way to get paid so you can have cash to pay for your bills now instead of when the invoices get paid. Instead of waiting several weeks or months to be paid by your vendors, factoring is a way to get paid immediately in exchange for a discount rate that the factor company is willing to offer based on your outstanding invoices. Factoring is a smart solution to manage your cash flow and cover your expenses today especially for cash strap or cash heavy businesses such as trucking, wholesalers, manufacturers and many others who are dependent on invoicing and waiting on terms, so you can move on with your business as normal as opposed to worrying when the next capital will likely come for those unfortunate enough not to have a line of credit readily available.
Simply put, there is a big advantages if done well factoring can do to your business. Since there is not payment as factoring is considered a sale of a company’s accounts receivable to factor company who has the knowledge of collection and servicing invoices on your behalf. in order to garner instant cash to continue to operate many small and large businesses, some turn to line of credit while other turn to term loans but those who has outstanding receivables utilize invoice factoring.
Typically, factoring invoice can be per case by case or you can commit for a long term commitment with the factor company if the use of cash is to cover daily operating expenses such as costs of payroll, maintenance, equipment, taxes, fuel and other types of overhead.
Some factor will allow you to pick and choose what invoice you want to factor so you are not limited to factoring your entire outstanding invoices. When you factor an invoice, it must be for business to business transaction that typically has been performed. Any transaction that hasn’t been performed typically is under Purchase Order which is a different type of financing all by itself. The Factor then bills your customers (vendors) for the work you completed and shipped for that matter. Your customer is instructed by the factoring company to pay the Factor usually created a mutual lock box to transfer payment to and to split funds once invoice has been fully paid instead of your business. Once your customer pays the Factor, the invoice is closed, taking in the discount rate and returning any excess receipt of funds above the discount rates.
Additional benefits of factoring:
- Liquid and quick access to dash– get cash in less than 24 hours if qualified after initial underwriting once your customer has been vetted to make sure that they’re going to pay the invoice as that’s where the advance will only be paid back.
- Bad Credit, No Problem– only customers credit history is taken into account however the vendor is also taken into account. For example, if your vendor is General Electric you can rest assure that those invoices will be paid.
- Unlimited Capital– factoring is one of the best sources of funds that grow with your sales. As long as you have an outstanding invoice and your vendor or customers has been vetted, you can just pass along any invoice you want to factor and it can be cash readily available to you in just a matter of hours.
- Eliminate Overhead– Many other who factor consider the associated costs with processing collection, invoicing and handling collecting eliminated and is handled by the Factor company. You can utilize the factor company as your outsourced collection agency. The factor strong vested interest to collect all outstanding invoice so that they’re able to recoup their investment into the company and those invoices.
- Flexibility-Since you can factor any invoice you feel, you are not locked in to a long term contract with payments as opposed to factoring whereby there is no payment and as little or as many invoices as you want you can choose when to factor.
Many factor companies specializes in their respective industry. There are many different types of factoring programs and factoring companies, and choosing the correct one for your business is an important decision especially if your invoices remains outstanding for a longer than expected or there is unpredictability of when that invoice will get paid as every day it’s overdue it accrues additional fees. Is factoring right for your business? Here help you make a decision that will be the right fit for your business needs.
Typically it’s hard to determine the risk of factoring due to the complexity of who is underwritten for the proper risk profile. We know that vendors are underwritten, but the business itself must be solvent to perform necessary work to make sure on time delivery, thus, on time payment.
Although it’s a straight-forward process, but a competitive pricing fee can run up from 2 – 3% discount rates of the invoice depending on how long the invoice is termed for: 10 days, 30, days, 45 days? The longer the invoice is outstanding, the higher the fees so invoice only vendors who pays the fastest or have the shortest term so you can minimize your fees. Make sure to find a factor that will charge on 30 bases as oppose on to 10 day basis as it will save big amount of fees for those who are inconsistent when it comes to making payments.
Look out for factor companies that doesn’t charge underwriting fees upfront. Most will not process your factor unless you’ve deposited a commitment fee or letter of intent signed with a underwriting fees. Here are other to look for when applying for invoice factoring.
- No origination fees
- No termination fees
- No monthly minimums
- No long-term contracts
- No daily/weekly payments
- No pre-payment penalties
- Lowest discount rates
- Have strong collection department
- Factor who understands your industry
As you can see, factoring is not a simple process especially for business owners who as so worried about vendors being contacted and redirected payments will make it seem uneasy to factor. IT’s typically fast and normal to factor and it doesn’t indicate that you as a business owner is hurting financially, but rather just understands that time value of money.
Let us help you with your factoring. We know lenders that have the lowest discount rates and have the highest factor rate with highest collection rate.