Invoice Factoring Overview Guide
Invoice factoring is a form of financing leveraged by businesses and agencies with a need for quick access to funding. The arrangement consists of the invoice factoring provider buying the invoices of a company and taking over the collections process. The company selling the invoices will be provided the cash advance upfront. Once the invoices are paid off, a fee is paid to the invoice factoring company. {' '}
Why Are These Services Used?
They are often used to provide cashflow for businesses who have slow paying customers. The companies provide the cash advance in order to make it possible for the borrower to meet payroll, inventory, and other types of obligations. Once the total amount of the invoices are completely paid off, the merchant pays the invoice factoring company a fee based off the balance.
What Parties Are Involved in the Transaction?
There are three parties in the invoice factoring arrangement. The invoice factoring company is the company responsible for issuing the invoices. The borrower is the customer who assumes the debt at the beginning of the transaction. The financing company is the entity that provides the advance to the borrower.
Do They Provide Excellent Service?
When selecting an invoicing company, there are some things that should be considered. Service is very important. Excellent service should be defined by you, the customer. You should look for complete transparency in terms. The terms should be clearly stated in the beginning stages. You may not want a long-term contract company if you decide that you only want to use this option for a temporary need.
You may want to make sure that your selection will provide you with the repayment term you need. Long-term contracts are often accompanied with high cancellation fees. Consider whether or not there are any monthly fees, and if so, are they fees that you would be comfortable paying long-term. You may also want to be responsible for all of the communications for invoicing between you and your customer base, so finding a factoring company that will allow you to oversee communications will be important to you.
How Long Have They Been in Business?
Experience does matter in invoice factoring. This is because the factoring process requires direct communication with the customer. You will want an experienced provider who can communicate professionally with customers to present a consistent, friendly service experience to your client base. Professional companies are also going to have a better track record when it comes to collecting on outstanding invoices. They have the expertise needed to process your invoices quickly, providing you with a quick turnaround. High performing invoice factoring companies deliver results that reduce the rate of buybacks for outstanding invoices.
How Do They Fund Your Payments?
The funds for the payments are issued in the form of a cash advance. The process ensures that the company secures the funds they need upfront. The invoicing company pays the advance immediately for invoices that are due within a specified interval. This means that you can collect your payment before your invoices are due for your customer base. Once the application is submitted, it can be reviewed in a matter of days. Upon approval, funds can be made available in a matter of hours.
What Factoring Type Does the Company Offer?
There are three main types of invoice factoring options available. Recourse factoring is the ideal option for companies who have customers with a good repayment history. This arrangement requires that the borrower pay what was advanced plus a nominal fee only if the customer fails to repay it within 90 days. Non-recourse factoring is the other factoring option available. The customer may or may not pay the invoice as required, but the borrower will keep the advanced funds. There is also a spot factoring option available. This process offers the highest level of flexibility in that you can select which invoices you want to be factored.
Does the Factoring Company Specialize in a Particular Industry?
The companies that are considered high-risk should consider working with invoice factoring companies specializing in their particular industry. For example, if your customers have a solid repayment history, then it will be financially advantageous to the invoice factoring company because they are assuming less of a risk. Riskier ventures can expect higher rates and terms. Examples of high risk companies include construction and healthcare. Low risk companies like transportation, consulting and staffing agencies will likely see more favorable rates.
Are Their Fees Competitive?
Average rates for invoice factoring range falls between .9 percent to 5 percent. The advance rate falls between 60 and 90 percent with the lower advances being offered to construction companies and other high-risk profile businesses. When considering fees, take into account cancellation fees and monthly fees that may be required.
What’s Considered When Evaluating a Company?
Invoice factoring companies consider a number of variables when evaluating a company’s profile. The number of monthly receivables factored, the average invoice amount, the industry, creditworthiness of customers, and length of time for repayment are all considered.
How Does Their Advance Rate Compare to Other Factors in Your Industry?
When considering a factoring company, it is best to submit your information to multiple companies to evaluate their rates. The volume of invoices, average amount of your invoices and industry information should be submitted for a quote to companies specializing in your industries. Eighty percent is the normal advance rate for a business.
Who Should Consider Invoice Factoring?
Although it is common for a business with an urgent or temporary need to consider the option, there are other instances where this option would be viable. The company may need quick access to the funds for expansion opportunities and growth. Some companies use it to maintain a consistent cash flow.
Simply put, invoice factoring offers you a cash advance on invoices due soon. The percentage amount and fees are determined by the company’s risk profile. The company’s information isn’t the only thing being considered, but the company’s customer base also plays a role in the company’s overall risk profile. When looking for an invoice factoring solution, prioritize the things most important to you like communications, fees, advance rate, and repayment terms. {' '}