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Setting up automatic debits is an excellent way to encourage your customers to easily pay their invoices. Offering payment plans rather than requiring companies to cover the full balance is another useful option. This way, you’re not left waiting on funds for weeks – sometimes even months – while your business continues racking up expenses.
Your bills don't disappear just because your clients haven't paid their balances, which is why many companies turn to invoice factoring. This financial solution provides fast cash for at-risk businesses that need help with essential expenses, from purchasing goods to funding payroll.
If you're considering invoice factoring payments for your company, you probably have questions. We've compiled a handy invoice factoring guide that explains the basics of this financial solution for businesses, including:
Factoring occurs when you sell your company's unpaid invoices to a factoring company. The factoring company takes a fee, often ranging from 10 to 20%, from your total amount owed.
Invoice factoring costs vary based on the balance on your invoices and the factoring company you choose. Some companies charge a flat rate rather than fluctuating invoice factoring fees. Other companies request a percentage of the funds you collect each month, such as 10% for the first month and 2% for each remaining month. This continues until you have completely repaid the amount of your factoring advance.
The factoring company owns your invoices until you repay your balance in full, which typically takes 30 to 90 days. During this time, the factoring company handles collection activities rather than your business. After you repay your factoring funds, your company resumes its regular collection process.
Think of invoice factoring companies as virtual consignment shops for your business. Instead of vintage clothes and furniture, you give a factoring company your invoices. You don't get what your invoices are worth because the company takes a fee, but you get fast cash when you need it most.
You may have heard the term "invoice factoring loans" before, but factoring invoices doesn't actually result in a loan. Factoring is a financial solution, not a loan or line of credit.
You may also see invoice factoring services referred to as a financial transaction, which is more accurate, as a transaction occurs between your business and whoever funds your factoring request.
Let's pretend you own a local business that sells fitness equipment. After clearing out your treadmill inventory, a large hotel racks up a $50,000 invoice and agrees to pay in full within 60 days. However, you need money 10 days from now for your company's payroll.
A bank loan requires stacks of paperwork and may take months to process, so you contact a factoring company instead. The company gives you a lump sum of cash for your invoice, and you agree to let them keep 10% of your revenue. The company also charges a 3% fee.
Based on this scenario, you would give the factoring company $6,500 for the transaction. That covers your 3% fee of $1,500, plus your 10% of revenue, which equals $5,000. Keep in mind that you may not receive your full $43,500 ($50,000 minus your $6,500 transaction costs) at once. Many factoring companies provide a large lump sum when you first apply, then give you the remainder of the funds after your customers' invoices are paid.
Aside from the quick approval time, factoring is different from a loan because you are selling a product -- your invoices. When you apply for a loan, you might offer collateral, but you aren't selling any goods or services. The lender only keeps your collateral if you default.
A loan also usually offers fixed monthly payments rather than payments that fluctuate based on your company's accounts payable history. A loan with a low-interest rate might cost you less money over time, but only if your business can afford its everyday expenses. If not, you might lose money by waiting on funds from a loan.
Invoice factoring and invoice financing are similar, but they have some key differences. Invoice factoring requires that you sell your company's invoices to a third party. Your invoices become collateral, which is similar to the loan process we discussed earlier.
When you factor invoices, the factoring company takes over collection activities on your behalf. That's not what happens with invoice financing. Customers typically don't realize you financed your invoices, as your business continues running as usual. Payments are still collected and processed by your company, not the factoring provider.
Funds are disbursed quickly with factoring and financing, but you typically don't receive all of your factoring funds right away. A factoring company gives you a partial sum in exchange for your invoices and then pays you the remainder after customer collection is complete. When you finance invoices, you receive the full amount of your agreed-upon funds in advance.
Factoring companies understand that purchasing invoices carries some risks. If your customers don't make payments, you might have to pay their balances yourself. Additionally, you may need to buy back your unpaid invoices or offer a comparable trade, such as a new invoice for a dependable customer.
Look for funds with a nonrecourse factor if you're concerned customers might not pay promptly. Funds backed by a nonrecourse factor do not require full repayment.
Factoring your invoices requires fewer documents than a traditional business loan or line of credit. The factoring company is primarily interested in your ability to repay the funds you were advanced, not your credit history. Typically, there is no credit check when you factor your accounts receivables.
Expect to provide the following documents when you factor invoices:
Some companies may also request a copy of your business card or recent bank statements that show the payment history of long-term customers.
As with all financial solutions, there are various pros and cons of invoice factoring. You must consider whether the advantages outweigh the risks when you request funds.
Factoring is a practical solution for many businesses, but it's not right for everyone. Consider these factors when determining whether you should sell your invoices:
When business owners consider factoring accounts receivables, many of them search for the best invoice factoring companies. BlueVine, Paragon Financial Group, TCI Business Capital, altLINE and Triumph Business Capital are five reputable options for businesses.
| Factoring Provider | Minimum Annual Revenue | Maximum Funding Amount | Expected APR | Advance Rate | Discount Rate | Funding Speed | Ideal for |
|---|---|---|---|---|---|---|---|
| BlueVine | $100,000 | $5 million | 13% to 70% | 85% to 90% | 0.25% to 1.35% weekly | 1 day | Quick invoice factoring up to $5 million |
| Paragon Financial Group | $360,000 | $10 million | 16% to 55% | 80% to 90% | 1.25% to 2.5% per 30 days | 3 days | Nonrecourse factoring up to $10 million |
| TCI Business Capital | $600,000 | $20 million | 12% to 55% | Up to 90% | 1% to 4% per month | 3 days | Monthly contract factoring up to $20 million |
| altLINE | $360,000 | $5 million | 9% to 55% | 90% | 0.75% to 3.0% per 30 days | 2 days | Short-term invoice factoring up to $5 million |
| Triumph Business Capital | $100,000 | $20 million | 13% to 55% | 90% | 1% to 4% per month | 5 days | Freight factoring up to $20 million |
Consider how a factoring company can meet your needs before requesting funds. For example, someone seeking small business invoice factoring may prefer a company with lower minimum annual revenue requirements, while someone who needs fast invoice factoring should look for a company with a one- or two-day turnaround. You should also consider whether companies limit how you spend your funds, such as requiring you to finance equipment or manage payroll expenses.
These days, there are a dizzying number of financial solutions available for businesses. Navigating them can be tricky, but Lendzi is here to help! Reach out today, whether you’re interested in invoice factoring services, a merchant cash advance, or a business line of credit. We’re here to help maximize your profit potential and keep your business running smoothly.