What are invoice factoring services?
Invoice factoring is a service provided by alternative financing companies that involves selling your outstanding invoices in exchange for cash, notably known as factoring. The factoring company or “factor” purchases an outstanding invoice, and advances a percentage of that invoice. Additionally, the factoring company will handle payment collection of the invoices directly with your customers. Invoice factoring services provide many benefits for a business, but there are qualification requirements to keep in mind when applying for invoice factoring.
One of the most important requirements for invoice factoring is fully and accurately completing an application. Factors typically request invoicing volumes and other personal information. The more detailed information you provide, the more accurate and seamless the beginning steps will be. The industry of the applying company, along with the type of customers invoiced, will help a factoring company determine whether to move forward with the transaction or not.
Your customers make a difference
Unlike a traditional bank loan, a business’s credit is not a major factor for approval. Instead, they consider the credit risk of the clients they invoice. The main reason for this – the clients will pay the factoring company directly, and do not want to risk nonpayment. It would be in a business’s best interest to consider which customers have solid credit, reputable relationships, and honor debts to get approved.
Have an A/R aging report ready to go
An accounts receivable aging report lists out any unpaid invoices, notes, and credit memos. This is an important document required for factoring. Factors will typically use this document to track what outstanding invoices you have, how much is owed, and when they will receive payment. This report may also be referred to as a schedule or schedule of accounts receivable.
Invoices = Factoring
One obvious – yet extremely important requirement for qualification is having invoices to factor. Without any unpaid invoices, you will not be approved for factoring services.
Tax ID number
A factoring company will also require a government-issued tax identification number (in some cases your business utilizes an individual’s social security number). They will use this number to verify your organization’s tax status, along with verifying if your business has any outstanding lien(s).
Many factors may not transfer money to a personal bank account. They tend to wire money to business-only accounts or ACH (Automated Clearing House) transfers. Simply put, if you would like to receive funding from a factor, you will need to have a business bank account.
Business Financial Health
Factoring companies want to ensure the organization they will potentially work with is financially healthy and sound. To do this, your organization may be requested to illustrate financial reports. These include, but not limited to: Profit & Loss or Income Statement, a Balance Sheet, Aging reports (A.R. & A.P), and bank/deposit account statements. The more readily available these documents are, the most swift and efficient the application process is for your business.
Working with a Factoring Company
Once a factoring company receives your application, they will tell you what other information they need from you. It is helpful to be prepared for their requirements – the earlier you send the factoring company all documentation, the sooner you can get paid!
Invoice factoring has numerous benefits and can help you grow your business with extra cash in hand. At CapFlow Funding Group, we provide instant liquidity with limited paperwork required.