Start With Your Invoice System, Firstīefore you jump into an alternative method of collecting payments, first make sure you’ve streamlined your own system.Ī lot of businesses (and individuals) have their own method of paying their invoices. This guide, created specifically for small and medium or small, medium, and growing businesses, will help you decide whether invoice factoring is right for you. That’s why you have to know what each financing option includes and watch for the pros and cons. Invoice factoring services and alternative methods to high-interest credit cards give you the money you earned before your clients pay. Instead of accruing late fees and dealing with a negative hit to your credit score, you can look at other financing options. Your bills won’t wait to get paid just because you haven’t yet, so you need cash now. However, if your business operates through invoicing, you still have overhead and expenses to cover. But many businesses invoice their clients, which means waiting until the customer decides to pay their bill. If you get paid upfront, this is easy to do. Over the course of 30, 60 and 90 days, these fees can become quite expensive, and leave you with only 2/3 of the invoices initial value.Part of being a small or medium business owner (SMB) is keeping tabs on your incoming revenue.
Usually, these fees are in the 1-2% range (of the entire invoice’s cost) and they are added each week the invoice goes unpaid. But the longer the invoice goes unpaid, the more fees the factoring company will charge your business.
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But a company may need to balance the need for full payment, with the need for immediate cash for such business needs as inventory, working capital, buying or repairing equipment, marketing, payroll, etc. There are obvious disadvantages to selling your selling your unpaid invoices, but the main would be that you are only getting a percentage of the total invoices value.
And while the creditworthiness of the debtor is an important metric in deciding whether to approve final funding, the factoring company is able to keep the transaction discreet so the debtor doesn’t have to know that such a transaction took place, allowing your company to continue doing business with the company that owes the invoice without causing friction in the business relationship. In fact, what matters more to the purchaser of the invoice is the creditworthiness of the debtor of the invoice. While credit is a factor in making a final decision whether or not the factoring company will purchase your company’s invoices, its not the only factor in the decision. The funding process when selling invoices is about as fast as a merchant cash advance and other short term business loans - which usually take between 1-4 days to fund, without having as high of a rate as those financing options. Factoring your company’s invoices allows you quick access to needed cash without having to present the factoring company all of your business and personal financial statements. There are many advantages in deciding to factor your invoices as compared to other forms of business and commercial financing. Most small business factoring companies offer small companies the ability to “spot factor” a single invoice - a one time factoring transaction in which the relationship between the business and factoring company ends when the invoice is paid - as opposed to traditional factoring where there is a continued relation beyond a single invoice. Invoice factoring company’s will usually only advance commercial and government invoices (meaning that they tend not to buy invoices in which the company whose invoice they are buying sells products to consumers rather than other businesses. Rather than relying on your company’s creditworthiness to secure financing, invoice financing companies actually look more at the creditworthiness of your costumer, as it is their future payment they are buying at a discount. Once the invoice is paid-in-full, the remainder of the invoice amount is released to your small business. When the factoring lender provides your company or small business the initial advance they will charge you a fee (usually between 1-3 of the total invoice, along with an additional fee added each week) and hold the rest until the invoice is paid.
With invoice financing (often called other terms like “factoring”, “invoice factoring”, “accounts receivable factoring”) a lender will provide specialized asset-based financing by using your business’s unpaid invoices as collateral to advance your company between 70-92% of the invoice’s total dollar value. Invoice financing is a business-to-business transaction that provides a company the ability to leverage unpaid 30, 60 and 90 day invoices to obtain specialized short-term business financing before your customer actually pays the invoice.
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