Invoice Factoring 101 

With the emergence of alternative financing options for businesses, invoice factoring has gained more attention because of its convenient benefits to small enterprises, such as increased cash flow, improved profitability, and faster payment times, to name a few. 

For those who are not yet familiar with the concept, invoice factoring is a non-traditional type of financing wherein businesses sell their outstanding and unpaid invoices with terms to factoring companies (or the companies who provide the funds) for a discounted price.  Invoice factoring is ideal for immediate funding needs, especially for growing small businesses that are aggressively expanding and optimizing their operations.  

There are two types of invoice factoring: recourse and non-recourse factoring. Recourse factoring pertains to the agreement between the business and the factoring company where the business will be responsible for any unpaid purchased invoices that the customer does not pay. On the other hand, in non-recourse factoring, the factoring company is the one who incurs the risk; the business would not be liable anymore to the factoring company for any unpaid invoices. 

This is invoice factoring in a nutshell. Below we will explain the basic process and requirements for invoice factoring. 

 

How does online invoice factoring work? 

Invoice factoring online is unique from other lending products. There are a few things that a business owner should know about how it works. 

Factoring companies can provide approval to qualified businesses in as little as two-three business days upon receipt of an application.  Once a business is approved for funding and the funding documentation is submitted and approved by the factoring company, the business can usually be funded within 24 to 48 hours from approval. The businesses can then refocus on better serving their customers and avoid any payroll or other payables delays. 

It is true that invoice factoring companies do not have rigid credit score requirements. However, they still conduct credit checks on the potential client (business owner). Once they are satisfied, the factoring company can now initiate the negotiation of the terms. Including the factoring agreement with the business. Whether it is recourse or non-recourse factoring, the factoring company will send a notice of assignment to the business’ client to inform them that they will now be the ones who will collect payments on the invoices moving forward. 

As a business owner, you should engage a reputable factoring company with a history of good customer service skills. They should be able to work with and take care of the relationship that you have established with your clients. 

Applying online for invoice factoring requires little documentation and fast approvals.

How to apply for invoice factoring online 

For your business to experience the advantages of invoice factoring first-hand, you must first apply and qualify based on their requirements. 

Below is a quick guide on how to apply for invoice factoring online: 

  1. Create an account on your chosen factoring company’s website and provide all the information requested. It is important to supply accurate information. 
  2. Prepare a copy of the outstanding invoices you intend to factor and submit. 
  3. When all the information requested is submitted, the factoring company will do its due diligence. It will evaluate all the documentation that you submitted and check the creditworthiness of your clients as well. 
  4. When the due diligence is complete and you are prequalified, the terms of the factoring agreement will now be negotiated. Once both parties are amenable to the terms and conditions, the agreement will be signed. After a notice of assignment shall be issued to your clients to inform them of the new payment instructions. 
  5. After the signing the agreement, and the initial factoring transaction is complete, the funds will be released to you. 

 

Qualifying online for invoice factoring 

You might ask: “How can I qualify for invoice factoring?” As an alternative financing option, qualifying for invoice factoring is not as strict compared to banks when it comes to requirements and the business’ credit score. Moreover, the release of funds is not dependent on collateral. What they do is collect a “fee” for assuming the risk and providing the funding upfront. The fee depends on many different factors. Such as the nature of your business’s industry, the volume and frequency of receivables for factoring, and the creditworthiness of your business clients, to name a few.  

CapFlow ensures its clients maximize all invoice factoring benefits. Reach out to us today for further information. 

The alternative financing industry 

Like any aspect of society, the financing industry experiences fast-paced changes. Before, businesses turned to traditional financing institutions such as major banks to fund their capital expansions. However, many businesses still were unable to access this kind of financing. As such, in the past few decades, new and non-traditional financing industries emerged to address this gap. While alternative financing has been around for quite some time, it’s stepping into the spotlight nowadays because of the more stringent requirements and higher interest rates that banks are imposing. This is expected to continue for quite some time, considering that the economy has been experiencing some contractions recently, and these contractions are expected to pervade at least for the time being due to different factors. What, then, is alternative financing? What are the different funding options that businesses can consider? And lastly, what’s new with the alternative financing industry this year? Let us dive in. 

 

What is alternative financing? 

Alternative financing pertains to funding sourced from non-traditional financial institutions like a bank. Unlike traditional funding institutions, alternative financing companies have more relaxed requirements, shorter or more variable tenors, and are purpose specific.  

The realm of alternative finance offers lots of advantages, especially to small businesses. It serviced the segments that traditional funders are unable to cater to due to certain restrictions, such as requirements for collateral, credit scoring, and interest impositions.  

There are different funding options that businesses can explore. Each has a different offering and can suit a wide array of business needs. Here are a few examples: 

These are just some examples. Innovative financing options emerge in a quick fashion, driven by the need of businesses. 

 

alternative finance industry

Equipment financing offers businesses the ability to acquire necessary equipment without having to bear the financial burden of paying for it upfront. 

 

What is changing this new year in the industry? 

While it’s true that alternative financing has been around for quite some time, we will find that this new year still has a lot in store for businesses to look forward to, may it be in the line of service improvement, or use of advanced technology. 

Finance industry leaders agree that the alternative finance industry will see growth this year. With more businesses looking for alternatives to banks to fund their ventures, alternative financing will be their next option.  

On the part of the funders, technology shall play a bigger role in optimizing their operations and further improving service. While there is a predicted dip in the tech industry this year, odds are optimistic that it will be overcome this year. Nevertheless, the alternative industry’s use of technology will bring more benefits to businesses and the industry.

CapFlow Funding Group (“CapFlow”) is pleased to announce the appointment of Kevin Gillespie as Vice President and Business Development Officer. Kevin comes to CapFlow with over a dozen years of experience in commercial finance, including Tradewind Finance and Bibby.

“We are excited to have Kevin join us to assist in enhancing and developing our revitalized sales and marketing efforts. Along with hiring Kevin, during 2022 we made significant investments in our branded properties as well as to add other personnel to our sales efforts to increase market penetration to provide liquidity and services to small- and medium-sized business (“SMB’s”), said CEO Andrew Coon.

CapFlow, along with its affiliate, CFG Merchant Solutions, provide an array of products and services to SMB’s, including invoice factoring, purchase order finance, supply chain finance, revenue-based financing (also sometimes referred to as Merchant Cash Advance or MCA), credit card split transactions, equipment leasing, and asset-based loans. CapFlow was founded in 2009 by Mr. Coon and William Gallagher as a response to a dearth of working capital available to SMB’s following the credit crisis of 2007-2008. As of December 31, 2022, the combined companies have provided approximately $1.65 billion in working capital to US-based small businesses.

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.  

 

Factoring Application  

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. 

 

For invoice factoring services, factors will be more concerned with a client's credit worthiness.

Factors tend to be more interested in your client’s credit worthiness than yours.

 

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.  

 

With invoices to factor, invoice factoring services may not be provided.

Without invoices to factor, you will not be able to factor.

 

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). 

 

Bank Account 

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.

What are alternative financing strategies? 

Alternative financing is funding provided for businesses outside of traditional bank loans. Alternative lenders offer a range of financing products with flexible requirements. Traditional bank loans tend to be a lengthy and difficult process to qualify for. Fortunately, there are other opportunities available for businesses with some alternative financing strategies 

 

Invoice Factoring 

Invoice factoring is an alternative financing process where a business sells their invoices to a factoring company. In exchange for selling their invoices, the factoring company advances a large percentage of the money owed to the business. They also directly manage payment with your customers. Once the invoice has been completely paid off, the factoring company will send you the remaining balance, minus a small factoring fee for their service.  

Invoice factoring provides businesses with immediate, ongoing cash flow. This will allow businesses to meet their short-term financing needs instead of having to wait 30-90 days to receive payment on invoices. Furthermore, credit score, collateral and loan history are not a major factor in getting approved for factoring. This makes receiving funding much faster and more flexible. 

 

Crowdfunding 

Crowdfunding is another alternative source of funding that allows for businesses to raise money from investors. Through the use of social media and crowdfunding websites business owners have the potential to meet investors and raise funding. This strategy allows businesses to raise money without resulting to venture capital investors. However, if the funding goal is not met, any finance that has been pledged will be returned to the investors. 

With crowdfunding, businesses rely on marketplaces to provide funding for their operations.

 

Merchant Cash Advance 

With a merchant cash advance, an alternative finance company provides businesses with a lump sum upfront, which is then repaid with a percentage of the business’s sales. This option is best for small businesses that need immediate capital. A traditional MCA is structured where the provider deducts a daily or weekly percentage of your debit and credit card sales until the advance has been fully repaid. This funding can be provided within 24 hours and repayments can be adjusted according to how your business is performing.  

 

Revenue-Based Financing 

Another type of alternative financing strategy is revenue-based financing. Revenue-based financing is a loan that a business pays back with a part of their future revenue. This strategy helps businesses successfully raise the capital needed without sacrificing their equity or any collateral. It also does not involve interest payments – repayment is a predetermined amount plus a flat fee. Monthly payments increase or decrease to match the natural fluctuations of a business, meaning you will not be burdened by payments you cannot afford.  

 

Benefits of revenue-based financing include it being cheaper and more flexible than other funding options, your business will retain more ownership and control of your business, there are no personal guarantees, payments are flexible, you may have a faster funding timeline, and more.  

A consistent cash flow is essential to sustain any costs, cost increases and overhead expenses for any type of food manufacturing business. The food and beverage industry know all too well the issues that can be faced with managing cash flow when it comes to day-to-day operations. One of the most common problems that is faced every day by food and beverage companies is having unpaid invoices, with long duration payment terms. Resolutions to this issue, such as invoice factoring, are crucial to understand to keep your business on track and growing.  

Factoring for food and beverage explained 

Invoice factoring for your food and beverage company allows you to have consistent working capital. All while waiting for invoices to be paid. To summarize what invoice factoring is: You invoice your customer, and you  then sell those invoices to a factoring company. Factors typically advance between 70-90% of the total invoice value, giving you access to your working capital within days. You remain in control of your business and customers; the difference is that your customer simply makes payments to the factoring company instead.  

Food and beverage companies work with factoring companies to cover expenses and get capital.

Get working capital faster to cover expenses.

Why factoring is a good option for food and beverage companies 

Food and beverage companies can struggle to maintain a solid cash flow. You try to meet demands, cover operating costs, payroll deadlines and more. Fortunately, factoring can be beneficial for resolving this issue. Not only can factoring your invoices allow you to comfortably stay on track, but it can also help grow your business. Having your capital readily available for you on demand in exchange for selling an invoice, can allow you to invest more in your food and beverage business. You can use that working capital to market and advertise your business or invest in additional inventory. Furthermore, it can be used for purchasing more technology, better equipment, higher quality products and more. All these examples can take your company to the next level without having to wait for invoice payments.  

 

What type of company should factor their invoices? 

 Essentially, any type of food and beverage company should consider looking into invoice factoring. Whether you are working with seafood, meat, dairy, fruits, and vegetables, etc., it can benefit your business in different ways. Having that cash in your hand gives you the opportunity to focus on working on your business and bringing more food to the market. Nevertheless, make sure to do all the research necessary. This will help you determine whether invoice factoring is right for your business. Furthermore, what to be aware of when choosing a factor.  

A huge issue many companies face is not receiving payments on invoices in a timely manner. This is a threat to your business and your working capital, as late payments can negatively affect your cash flow. Fortunately, there are a couple ways to try to prevent late payments. 

Accept multiple forms of payment.   

Giving your customers flexibility when accepting payments may get you paid quicker. Offering multiple forms such as credit card, cash, bank transfers, and mobile pay gives your customers options. In return, it should make the entire process faster and easier for them, allowing payments to smoothly come in.  

Companies tend to not get their invoices paid on time because they do not offer flexible payment methods.

Offer flexible payment methods to customers for faster compensation. 

Automate invoicing.

If you send out your invoices on a specific date every month, it may be more beneficial for you to send out invoices as soon as possible. Try to send out invoices according to the terms agreed upon in the contract, or as soon as the task has been completed. If you find that to be burdensome, consider automating your invoices. To automate your invoices, businesses use a software to create an invoice template that can be used multiple times. With this software, once a new invoice is sent over, the information will be entered in the template and scheduled to be delivered. By automating your invoices, you save time by not having to prepare every invoice manually. Release these automated invoices as soon as possible, then follow up with your customers to ensure for a smooth transaction process to promote business growth. 

 

Incentivize early payments  for getting invoices paid.

The faster your clients get their invoices paid, the better. Without any benefit or reward for early payments, they may not feel inclined to pay earlier. Even a small 1-3% discount on the invoice total for payments made 10-15 days before it is due allow invoices to be fulfilled faster. This incentive can be offered to give thanks to your customers who make paying a priority and it can also help you build stronger relationships with clients.  

 

Overall, dealing with invoices can be a bit inconvenient and troublesome. Try to implement these techniques to make the process easier. You may also want to consider selling your invoices to a factoring company for a small fee, and they will deal with your customers’ invoices directly. If you are in need of working capital fast, this option can be beneficial for you. You may receive a large percentage of the invoice total within days. Instead of waiting for the invoice to be paid. You will also have the added benefit of having the factoring company become your back office. By monitoring your accounts receivable to assist you in ensuring timely payment.