All you need to know about invoice factoring and the best factoring companies
Invoice factoring, also known as invoice financing or accounts receivable financing allows small business owners to access easy cash by selling their customers’ invoices in exchange for working capital.
Rather than wait for 30, 60 or 90 days for a customer to pay, you can get cash advance by issuing unpaid invoices as collateral, which is essential when you have difficulties meeting short-term business needs.
One benefit of invoice financing is that you get cash that you already have. This means that you won’t have to worry about paying long-term debts. Small business owners can use the funds to cover short-term business needs like purchasing supplies, payrolls, and repair business equipment among other uses.
You can also take on a new business opportunity that would otherwise be impossible due to insufficient funds. Since you don’t need to have good credit to qualify for funding, both startup and established businesses can qualify for invoice financing.
This article will give you a clear picture of how invoice factoring works to help you determine whether it is a good choice for your business.
Breaking down ‘invoice factoring’
Generally, there are 3 parties involved in the invoice factoring transaction;
- The business that issues the invoice
- The customer
- The factoring company, also known as a factor
How invoice factoring works
Let’s say you have an outstanding invoice of $200,000. You find a factoring company that provides an initial amount of 85% value of the invoice. This amount, which in this case is $170,000, is referred to as an advance rate.
You can receive the funds within 24 hours. The factoring company holds the remaining 15% (which is $30,000 in the above case) in reserve. If your customer promises to pay within 2 weeks, the company will charge fees on the outstanding amount for a period of 2 weeks.
Most companies charge a 1% factoring fee every week until the invoice is paid. Some companies also have additional charges in form of processing or collateral fee, which are also deducted from the outstanding amount. Once the customer pays, the remaining percentage – less the factoring fee and all other charges are forwarded.
When does factoring make sense?
If you need easy access to cash and it takes longer for your customers to pay, invoice factoring can be a smart option. Compared to other financing options, factoring has an easy and straightforward application process.
You can also be approved for higher amounts compared to bank loans. Additionally, you don’t have to wait for weeks for the business to be funded. Once approved, you can receive the advance rate within 24 hours and the remaining amount once the customer pays.
The most important part of it is that you will get immediate cash to meet your short-term business needs.
How to choose a factoring company
Factoring is an established industry in the United States. It is used in different sectors, including technology, wholesale trade, public relations, manufacturing, and marketing companies among others.
Unfortunately, many small business owners are still not familiar with this financing option. With the development in technology, the factoring industry has also undergone tremendous changes which include the emergence of online invoice factoring companies.
Here are some of the things you should consider when shopping for an invoice factoring company;
- The type of factoring offered
Most factors specialize in providing either recourse or nonrecourse factoring. Some companies offer both options.
The factoring loan terms also vary depending on the type of factoring you want. With recourse factoring, the company agrees to take liability for any uncollected invoices. If the customer does not pay the invoice, the company pays the factoring company the entire amount due.
When it comes to non-recourse factoring, the factor is liable for the uncollected invoices. Since this is a riskier option for the financing company, they tend to offer low advance rates and higher fee charges.
- The type of industry they specialize in
Some factoring companies specialize in financing a specific industry. You can work well with a company that knows your industry.
You can get more information about the company by asking questions and asking for past client references.
- Competitive prices
The amount you get will depend on the value of your invoice, the amount you want to factor, customers creditworthiness among other factors. In most cases, the factoring rates are between 1.15% and 3.5% in a period of 30 days.
But you can also find companies that advertise their rates in a way that you may not be able to determine the total factoring cost. You should especially be careful about cheap rates since some of them may have hidden costs.
- Period in business
This is among the most important things to consider in a factoring company. The best factoring companies are usually the ones that have been around for a longer period.
The long period in business means that they have experience in providing factoring services and can manage accounts at any economic circumstance.
4 best invoice factoring companies 2018
Waiting for payment from customers can be frustrating for any business owner. Businesses of any type – either small or large corporations can at times have cash flow issues caused by slow paying clients.
Some customers may even request for a longer time to pay, making it impossible to meet pressing business needs. Many businesses use invoice factoring for immediate access to cash without getting into debts.
Here are the best invoice factoring companies you can consider working with;
BlueVine has been offering factoring services for years. They provide invoice factoring and line of credit for amounts up to $5M. The approval process takes only 24 hours.
For invoices due in seven to ten days, funding can be as soon as 1 business day. Both the application and approval process takes place online and it is 100% paper free.
The company provides an advance rate of between 85-95% and has a factoring fee of 1% per week.
Triumph provides factoring financing services to different industries including manufacturing, security, staffing, business services, distribution and oil and gas. With this option, businesses can receive an advance rate of up to 90% of their invoice value.
The funds are approved within 24 hours. The remaining 10% less the factoring fee is issued once the customer pays. The factoring rate ranges from 1-4% depending on the customer’s credit history and the company’s annual revenue.
- Paragon Financial Group
This is also a great option for small businesses that want to meet their immediate financial needs.
The company offers factoring amounts ranging from $250,000 to $10M with rates of 1.25-2% per month. They provide an advance rate of 80-90% of the invoice value. Once approved, you can receive funding within 5 business days.
- TCI Business Capital
This is also a great option for businesses that are short of funds due to slow payments from clients.
The company charges a discount rate of 1-4% per 30 days for amounts ranging from $50,000-$20M. They provide an advance rate of about 90% which is issued within 24 hours.
Is factoring worth it?
With so many financial services available for small businesses, not all of them will work well for your business. If you need quick funding and have reliable customers who can guarantee payment on time, if you can afford the fees involved and if you take time to find the best factoring company to work with, then there is no doubt that your business will benefit from factoring invoices.