Invoice factoring has become one of the alternative financing options that businesses of all scales turn to for additional funding. May it be for an investment or budget augmentation, invoice factoring is a good option to raise any funds needed.
Import and export companies likewise turn to invoice factoring. In this article, we will learn more about import-export factoring, how it benefits these companies, how it works, and the process of application. Let us dive right in.
Import-export companies are generally large companies with transactions from all over the world. Given its magnitude, it is bound to need more funds for business expansions and unexpected finances to keep the company going. Here are the benefits of invoice factoring to import-export companies.
Import factoring offers to fund businesses situated abroad intending to do business in your local area. Others find this kind of funding risky, but as the adage goes: high risk equals high rewards. Import factoring generally begins on a higher beginning mark, from $200,000 to $300,000. By resorting to importing factoring, these companies can have additional capital without incurring any debt, and therefore, removing the need to open a line of credit with banks.
Export factoring helps to fund export companies without the need for any security instrument or collateral other than the outstanding invoices that the company has. It gives wide elbow room for working capital improvement and reduces the risk of bad debts. This way, you gain access to additional financing for the business and at the same time, take advantage of supplier discounts available.
The process of import-export factoring involves advancing the cost of outstanding or unpaid invoices of import and export companies. The companies turn over their unpaid invoices to factoring companies. In turn, these companies release the invoice amount minus a small portion of the processing fee. The factoring company now assumes the businesses’ role as the creditor of the customers whose invoices were sold.
They will now be the ones to collect the outstanding amounts for the businesses’ customers. In this funding scheme, import-export companies would not need to wait long for the release of funds. Unlike the lengthier process that traditional banking institutions take. The funds could then be used to support the needs of the company – from payroll payments to operation and other overhead expenses.
Different factoring companies have their own process when it comes to import-export factoring applications. Briefly, here is how it works:
1. The import-export company should have a reliable and established international client, with good credit history.
2. The business and the customer should iron out the details of the transaction. Once the details are threshed out, the company then issues an invoice for the transaction.
3. The company now fulfills its end of the transaction by shipping the goods and making sure that all the necessary paper works were taken care of.
4. The company now goes to the factoring company with the invoice together with the other documentation needed (insurance premium receipt, bill of lading, etc.). These documents will now be verified, and the customer’s credit history will now be checked. Since we are talking about international transactions here, it will take more time than usual for local factoring transactions; however, the turnaround time is still quick.
5. Once the approval comes through, the company can expect the release of the funds within 24 to 48 hours.
The process may vary slightly, depending upon the protocol of the factoring company. This is but an overview of what you can expect from your application. Invoice factoring alongside other alternative financing schemes is here to be maximized. Know your options and explore more to get the best for your business.
Businesses typically have urgent and unexpected needs that would require additional financing. When the need arises, it’s usual for companies to turn to traditional banks for the funding that they need. However, with the advent of alternative financing, more options are now available to businesses. One of the more popular alternative financings is invoice factoring.
To those not yet familiar, you might be thinking: “What is invoice factoring?” Invoice factoring is the process of “selling” a business’ invoice to a factoring company, which will then pay the amount of the invoice to the business less a small portion as a fee. Now, invoice factoring and bank loans are both used by businesses as a means to the same end: funding. Businesses need funds to keep their cash flow smooth and to keep abreast of all their dues and payments. In this article, we will get to know each of their advantages and understand what sets one apart from the other.
When it comes to accessibility, invoice factoring brings much to the table for businesses, especially for small and start-up businesses. It has a comparably quicker turn-around time from application to approval. After the factoring company confirms that your customers are creditworthy, the release of the funds would come next. Moreover, unlike traditional bank loans, you will not have to deal with high-interest rates or monthly payments. The factoring company releases the amount to you in bulk and then withholds a certain portion as their fee. This way, the factoring company becomes the new creditor of your customers as they will be the ones who will collect the outstanding amount from them.
Stability is the strength of traditional banks. Thus, while there are many alternative financing options these days, many businesses still rely on bank loans for their financing. Businesses that are looking for steady income streams in the future can take advantage of the installment schemes that banks have to offer. Moreover, the amount that you can loan can depend on your business assets and other factors. In the event your business encounters any unforeseen circumstance that would prevent it from paying the loan in the schedule agreed upon, you can have your account restructured in such a way that would be beneficial for you and the bank. This way, you will not have a bad record with them.
After we have explained the benefits of both financing options, we now look into the differences.
In invoice factoring, the application is easier. So long as you have outstanding invoices with customers that have good credit standing, factoring companies should not hesitate to do business with you. On the other hand, banks do not fund businesses as easily. Often, banks favor established businesses with good credit records over businesses that just started. Also, having assets that can be used as collateral could be a tremendous help in nudging the bank to approve the loan.
Invoice factoring is a streamlined process. Businesses would need to fill out the form and provide all the needed information, as well as attach the list of their customers for the background check. Banks, on the other hand, have a set of requirements that you need to comply with, such as bank statements, a list of creditors and customers, etc., after which a background check will be conducted to verify the business’ creditworthiness – all before the loan will be released.
Both fundings would inject much-needed funds into the business. However, with invoice factoring, you will not have to pay any interest and thus there are no additional costs to the business. Moreover, since the approval is quicker, it would be a major help in case the business need is immediate. We can now see why invoice factoring is used to improve cash flow by many small and starting businesses. On the other hand, funding from a bank would mean the business would now incur debt. Nevertheless, if the business has a sure stream of income in the future, then taking in the loan would not disturb the business’ cash flow.
CapFlow Funding can provide you with the invoice factoring service that you need. Not sure about invoice factoring and would like to explore other options? CapFlow offers other options as well. Reach out to us and let us have a conversation about what is best for your business.
With their stringent requirements and high-interest rates, small to medium-sized businesses are having a hard time securing a loan from traditional banks. Good thing that there are alternative financing options that businesses now can avail of to get the funding they needed.
What, then, is alternative financing? Alternative financing means obtaining funding from non-traditional funding or non-bank institutions. It has a different process of approving credit or funding, and the terms and conditions are different than those of a traditional bank. It caters to businesses of all magnitudes but small to medium-sized businesses could leverage the advantages that alternative financing brings.
While alternative financing has been around for quite some time already, there are still some misconceptions about it due to a lack of exposure to the products. Let us discuss here to dispel these misconceptions.
Small to medium-sized businesses are wary to try alternative financing because of the myth that they need to have high margins to be able to have access to these kinds of financing. This is definitely not the case. An alternative lender caters to businesses of all sizes, including small and medium-sized enterprises. Others even prefer small businesses as clients. Don’t let your current business margin faze you!
This myth is the one that stops small to medium-sized businesses in their tracks. But the truth is, alternative financing employs a more streamlined process. While traditional banks would require good credit standing, some alternative financing would not even look at credit scores in screening your business. Some would only require a list of your current customers, or even expected revenue streams. Seeing as these requirements are not difficult to provide, it’s easy to say that small to medium-sized businesses could opt for alternative financing easily.
Traditional banks usually have regulators that oversee their business. Seeing as these alternative financiers are not banking institutions, it’s easy to understand why many would think that they are unregulated. However, this is far from the truth. Transactions involving alternative financing involve contract and commercial laws and require adherence to federal and state laws regarding financial transaction disclosures and other regulatory issuance.
Credit scores pertain to your ability to meet your obligations to your creditors. A good credit score means that you were able to pay your dues on time and maintain a good record with your banks. Credit score entails your ability to pay your debts; alternative financing on the other hand is revenue-based financing, without the business incurring debts. Since there are no debts involved, transactions involving an alternative lender would not in any manner affect your credit score.
These alternative financing options fill the gap that traditional banks leave: they provide the much-needed funding for small to medium-sized businesses that are not qualified to avail loans from traditional banks, or even if qualified, are unable to do so due to a myriad of factors. It gives these businesses a lifeline that they can hold on to to be able to pursue their business goals, as well as access to additional funding for any immediate or urgent needs of the business. This is why these common misconceptions should be put to rest so more businesses would be encouraged to try and explore these alternative options.
There are already lots of alternative financing options out there that businesses can consider. Bearing in mind what’s best for the company. Here are some options:
Invoice financing – this alternative financing involves the sale of a business’s unpaid invoices to factoring companies. They pay a certain percentage of the invoice amount to the business.
Merchant cash advance – under this financing, the business owner receives a lump sum amount from the financier. In return, the business owner will pay the financier a certain portion of its revenue from credit card and debit card sales.
Credit card splits – in this financing, businesses can have a credit card split agreement where the financier will provide a lump sum amount for the business’ urgent funding needs. In return, the financier will have a portion, or “split,” on payments made to the business using a credit card.
These are but a few examples of alternative financing that are available for businesses. Moreover, it is not uncommon nowadays for banks to partner with alternative financing providers. This way, businesses need not navigate on their own to find the best funding that would suit their needs. For businesses, now is the best time to explore and get to know more about these alternative financing options.
It is important to have a contingency plan for any eventuality in your business. As the adage goes, nothing beats preparedness. If anything, this is what the onslaught of the COVID-19 pandemic taught us. One of the many ways that you could protect your business is by putting up a cash reserve.
This pertains to the funds allocated for any emergency. Cash reserve for businesses is made specifically to prepare for any financial crisis that the company may face. Having one is important if you want your business to thrive.
Your business may face an unexpected event that would disrupt its cash flow. If that event is of a significant scale, it might have a negative impact on your payables such as your suppliers, employees (if any), and other fixed operating expenses. If you have no cash fund already set aside, your profits could be affected, or worse, might put your business in deficit already. This is why a reserve is important: these emergencies can be ironed out by the funds that it will provide, making it possible for your business to continue its operations without disruption.
A cash reserve for small businesses is something that does not materialize overnight. There is a process for building it up so you can maximize it and help your business with it.
Building cash reserve begins with determining how much you need to save. However, it is important to keep in mind that there is no one correct amount when it comes to putting up a secured reserve. The basic practice is to add up all the necessary and fixed expenses in a month and keep a total of two to four times that amount as a reserve. These expenses can include employees’ payouts if you have any, taxes, rent, and more.
We cannot over-emphasize that there is no exact amount of cash a business needs to reserve. It depends on many factors such as the needs, nature of the business, and others.
Here are a few things that you should be on the lookout for to determine the size of the cash reserve:
Is your business just beginning to gain traction, or is it already established? Start-ups and established businesses have different benchmarks for reserves. Start-ups are usually conservative given that they are only beginning to gain momentum in the business and need all the resources that they could get to optimize the business operations.
Note how much your business expenses are. It is important to factor in the expenses first before you decide on how much to allocate for a cash reserve.
Keep in mind purchases of equipment, business expansion, operating expenses, and more. This will help you map out where your business is financially.
After taking note of these things, you can now better decide how much you can and must put away for a cash reserve.
They say, “The weapon is only as powerful as its wielder.” A cash reserve can only do so much if you know how to maximize it. So, here are a few tips on building a reserve:
1. Make a habit of putting aside a certain amount every end of the week to stash in the reserve account.
2. If there is a windfall in your business, make it a point that you also put a certain percentage of it in the reserve fund.
3. As much as possible, avoid unnecessary expenses while building your reserve.
4. If you have lots of business debts to pay, it may not be ideal for you to put up a large cash reserve, or anything at all. Make sure that if you have debts, it should be the one that gets paid first. Then, if the profits permit, add to the reserve.
Like any other industry, the invoice factoring industry weathered some storms and enjoyed some victories in 2022. Before we jump into the new fiscal year, let us quickly revisit the state of the factoring industry during the past year.
According to research, in 2022, the value of the U.S. Factoring Services Market was $153.9B while the value of the global factoring services market was $3,566.99B. Its expansion is expected to have a compound annual growth rate (CAGR) of 9.2% from 2023 to 2030. The factoring industry provided the alternative for bank and other traditional financial services that imposes rigid requirements. This helped the industry gain the traction it needs. However, the industry took a hit in cybersecurity. Many businesses reported being targeted by malware and hacking attacks, resulting in significant financial and reputational damages. To address this, different cybersecurity companies are already devising a way to help factoring companies strengthen their security system. This should avert such mishaps in the future.
As 2023 ushers in, industry leaders remain optimistic about how the factoring industry will fare. Though there is currently an economic slowdown, industry leaders see a silver lining in this predicament. While banks and other financial institutions will be more rigid in terms of credit requirements and interest rates, businesses will begin looking for alternative financiers, and this is where invoice factoring comes in.
The factoring industry stands to experience some challenges this year. These include managing the increasing number of defaulting clients, as well as better handling of operating expenses, essentially a client’s borrowing cost of factoring companies. Moreover, interest rates will remain generally high across the year, affecting all businesses across all industries. This will present industry leaders who believe in turning challenges into opportunities: small-scale businesses will seek funding to support their general operations or plans for expansions. This then provides an opportunity for factoring companies to increase their portfolio, with a caution to be more prudent in client selection due to the increasing number of defaults brought about by unfavorable economic conditions. Businesses can take advantage of reducing credit risk when using invoice factoring, especially for non-recourse factoring.
CapFlow understands that invoice factoring brings a lot of advantages to the table for businesses, especially for small-scale enterprises at that. The general expectation is positive for the factoring industry. It is envisioned that more businesses will turn to factoring companies as an alternative to banking institutions as it offers easier access to funds but with less stringent requirements and absolutely no impact on credit score. Moreover, the high-interest rates of banks generally push businesses to explore other options to secure funding for their ventures. There are lots of acquisition opportunities seen for the year as well, for risk-takers to seize the opportunity of acquiring other companies. Despite the challenges, these opportunities will make 2023 a great year for the factoring industry.
The staffing industry is responsible for supplying much-needed resources to different businesses of varying industries. This could be in the form of permanent, contractual, or temporary employees. The industry plays a crucial role as it provides businesses with the right candidates with the right skills for the right position.
The staffing industry relies heavily on a healthy cash flow for its smooth operations. Due to having many employees to take care of. However, like any other business, it needs to wait to collect its receivables from business customers for the business to move. In certain cases, it takes a week or more, or even months, before payment comes in, jeopardizing the cash flow. As a business owner, you don’t wait for this to happen – this is where staffing factoring plays in.
Staffing factoring is the process where staffing companies sell their outstanding invoice (also called “payroll funding”) to have cash in hand to deliver essential business needs and even improvement projects.
Not all industries and businesses are eligible for staffing factoring. There are certain requisites to be able to qualify, such as:
1. A proper record-keeping of invoices to demonstrate good file organization.
2. Having customers with good credit scores to show that you have good-paying clients who can meet their obligation in the invoice.
These are but a few of the basic requirements. Different factoring companies have different policies, so it is best to check on them first to be able to be fully compliant.
There are many advantages of invoice factoring for staffing companies. To help convince you, here are a few of the benefits of using invoice factoring:
Availing the service of a factoring company gives your business additional budget that provides more elbowroom for your business. The additional budget can be used as an additional working capital to pursue other plans for the business.
As funding increases, so does the opportunity for the business to grow and expand. Having a good cash flow can give your business the security that the expansion that you have in mind can be executed. May it be in the form of new equipment, another line of product or service, or the opening of another branch.
Instead of waiting for the duration of your invoice, which usually lasts 30 to 90 days, you can get paid sooner. Once the factoring company that you applied to approves your application, you can be paid in the next few days.
Factoring companies pre-qualify businesses that apply for staffing factoring by assessing certain documents. These documents will help you secure the much-needed approval, so it is best if you prepare them. Accomplish the factoring company’s application form. Properly fill in the application form and provide the details requested. Remember to be truthful and as detailed as possible with the information that you will provide to make the credit check much easier.
Additionally, be prepared to provide a copy of your customers list if it is requested. Once you passed the screening, invoice factoring takes place. The factoring company then pays the business the percentage of the face value of the invoice. Upon full payment of the invoice, the factoring company releases the remaining amount. Then, deducts a certain portion as their fee for advancing the amount.
CapFlow has an experience working with different industries and believes in the benefits that invoice factoring brings to your business: a more robust and solid cash flow.
Behind a successful business is good cash flow. However, this may not always be the case, especially if a business has many outstanding invoices. Invoices are normally payable in 30, 60, or 90-day terms. Sometimes even longer. These long waiting periods can disrupt a business’s cash flow, which, in turn, affects the business’ performance.
This is where invoice factoring comes in. Invoice factoring is the process of selling a business’s unpaid invoices to a factoring company (also known as the “factor”). In the process of selling a product or providing a service to a customer, a business issues an invoice. These invoices represent the amount payable by customers to the business. Instead of waiting for the invoice to mature and collecting the amount from the customer, the business sells the invoice to a factoring company. Once a business has sold its invoices to the factor, the latter sends a notice to the customer to inform them that all payments should now be directed to them.
A percentage of the invoice is paid by the factoring company as an upfront payment. Once the customer has paid the invoice, the factor releases the remaining amount and retains a small portion, which serves as their “fee” for advancing the amount and assuming the risk.
Invoice factoring can be a good alternative for small businesses or businesses that are just starting due to lower risk and lack of required collateral. Moreover, it does not have an impact on a business’ credit standing. This gives businesses the jump start that they need in terms of funds.
Funds are the lifeblood of any business; therefore, a good cash flow is crucial to ensure the business’ healthy finances. A healthy cash flow gives a business the capacity to better manage its present and future financial goals, as well as meet its current financial responsibilities, making the business more robust and profitable. Moreover, having a healthy cash flow means having enough working capital that the business can use. Here are a few tips to help businesses ensure that they have enough working capital for the whole year:
Businesses should be proactive. They should not stand idly by and just wait for customers to pay off their invoice dues. Invoice factoring is one of the many ways that businesses can do this. Here are the ways invoice factoring can help improve the cash flow:
The business is no longer dependent on a customer’s payments since the invoices have been sold to the factoring company. As such, they need not wait for the invoice to mature since the factoring company will pay the business upfront and at the same time, assume the risk of collecting the amount due in the invoice during maturity.
Once the invoice “sale” is concluded, the factoring company will pay for the invoices. The amount that the business receives can serve as additional working capital to further improve the enterprise.
Cash flow pertains to the money that flows in and out of the business. When you say invoice factoring is used to improve cash flow, it only means that by using the proceeds of the sale of the invoice productively, the business can optimize its business potential by taking in more customers or even consider a business expansion.
We have discussed what invoice factoring is, how it works, and how it helps in a business’s cash flow. If you have a business, this is worth your consideration. At CapFlow Funding, we treat our clients’ businesses as our own. We have many different options for your funding needs and can help you decide what is most beneficial for your needs.