Invoice Factoring 101

Invoice factoring is a way for businesses to sell their accounts receivable to a factoring company in exchange for cash. Unlike a normal loan, invoice factoring services provide you with cash that is already owed to your business by customers. The process works in three easy steps.

First, you sell your outstanding invoices to a factoring company, who will give you between 70-90% of the invoice total. This advance can be used immediately for working capital.

Second, the factoring company will collect payments from your customers directly.

Lastly, once the total invoice has been paid off by your customer, the factoring company will send you the remaining balance minus a small fee.  

 

Pros of Invoice Factoring 

 

Immediate Cash Flow 

Waiting 30-90 days for your invoices to get paid can be disadvantageous for a growing business. Additionally, some businesses may have to turn down big orders or they cannot meet necessary financial obligations. Fortunately, many factoring companies offer funding within the same day, which means you can keep your business running smoothly. Instead of waiting you can meet any short-term financing needs or have a safety net of working capital for any emergencies.  

 

Better Chance of Getting Approved 

Getting approved for invoice factoring can be easier than a traditional bank loan. Credit score and loan history tend to not even be factors in approval. Factoring companies are more concerned with the creditworthiness of their customers – since they will be the ones making payments to them. Instead of waiting weeks for approval and having to submit collateral, with factoring services you can get approved in 24 hours with no collateral required.  

 

Ongoing Cash Flow 

A business can turn to factoring services as many times as they would like to. Due to this, you can always have ongoing cash flow. Since you do not have to wait for invoices to be paid when you factor, you can always have extra cash to expand your business.  

 

 

Learn about the pros and cons of invoice factoring.

Weigh your options about invoice factoring.

 

Cons of Invoice Factoring  

 

Dependency on customers 

A factoring company will determine your customers’ creditworthiness before approving your invoices. If they have a habit of not paying on time, they may be less likely to take on the risk of approving your funding. Additionally, depending on the factoring company, any non-payment from your customers may result in you having to pay for it.  

 

Costs 

Typical costs for invoice factoring are around 1 to 5 percent of the total invoice amount. The factor rate can be charged as a one-time fee or every week/month. This fee is a tradeoff for receiving immediate cash, but if your business is on a tight budget, it may not be beneficial for you to factor your invoices.  

 

With CapFlow Funding Group, the typical fees range from between 1 – 2%.  

 

Is Invoice Factoring Best for your Business?  

For a growing business, it is essential to make the best decisions to support and continue growing. Invoice factoring can help a business get working capital quickly, which in turn can help them cover operating expenses and expansion. The costs of factoring may be worthwhile to have a consistent cash flow. However, you should look into a factoring company’s maintenance, processing, or advance fees before working with them to help determine this.  

What is invoice factoring?

Invoice factoring is a type of alternative financing where a business owner (the client) may sell their unpaid invoices to a factoring company for cash. When an invoice is approved then sold, the factoring company would pay the business a percentage of the total invoice amount (the advance amount). The factoring company will collect payments directly from the client’s customer. Finally, once the customer has paid the invoice in full to the factoring company, the factor will pay itself back the advance amount plus the factoring fee due at that time. Invoice factoring is not a loan, it is simply an advance based on approved accounts receivable due at a later date. Ultimately, the advance provided by the factoring company is the business’s money, which they are just receiving faster than they normally would.  

 

When to consider invoice factoring services for your SME 

Invoice factoring services are available to businesses that have creditworthy customers, invoices to factor, and need quick working capital. The main reasons some businesses turn to invoice factoring are to get working capital to cover any operating expenses, grow your business, or simply have a stable cash flow. With improved cash flow, a business can make payroll, purchase new equipment, pay suppliers, fulfill larger orders, and more.

 

Consider invoice factoring services to improve your cash flow. 

 

Does invoice factoring affect customer relationships? 

A common concern when businesses consider factoring their invoices is how a customer may react to this new process. Since the business would no longer be directly collecting payments from their customer, the relationship may change a bit. Reassure your customer that essentially the only change is that instead of making payments to you, they will make payments to the factoring company. Everything else should remain the same as it is only a change in the remittance address.  

One misconception of invoice factoring is that customers may question the health of your company and choose not to work with you. However, most customers will understand how beneficial invoice factoring can be for a business. It is important to have effective communication with your customers. If they are confused about the process or believe your business may be failing, explain to them why you have chosen to factor the invoice and the minor changes they will face. Another misconception is that the factoring company are debt collectors who will harass them. At the end of the day, a factoring company’s relationship with your clients is just as important to them as they are to you. They want to operate in an ethical and reputable manner to continue working with your business and others.  Communication between the factoring company and the customer is key in any factoring relationship. 

 

How to manage the relationship between customers and your factoring company 

In order to maintain a good factoring relationship with your customers it is important to carefully choose a factoring company whose values align with yours. Consider how long they have been operating, their business practices, and reviews from anyone they have previously worked with. Healthy customer relationships are one of the most important keys to success for any business. Another way to manage your factoring and customer relationship is to have open communication. Educate your customers on the process, alert customers about the factoring company before they send your customers a notice and ask them about their experience after they pay off their invoice. This will prove to your customers that you are putting in effort to maintain a good relationship with them.  

 

A seamless funding partner: invoice factoring with CapFlow  

If you are considering a factoring relationship but you are unsure or are feeling a bit overwhelmed about it, we can help. CapFlow Funding Group offers our partners personalized services and values the relationships we have established with all of our clients and their customers. While redirecting payments from your customers may be new to you, we care about your business objectives and will navigate this change with you. CapFlow does not harass your customers and will always communicate with you, the business, on any issues that may arise prior to contacting your customer.  

As global and consumer prices increase, economists and entrepreneurs predict supply-chain hikes will continue through at least the rest of the year. As consumer prices increase, wages, the cost of raw materials, distribution costs, and more may also increase. This can be hurtful for businesses that may have poor financial health or were not prepared for the effects of inflation on their business. Fortunately, there are ways to manage and protect your business from inflation and remain profitable.  

 

Prioritizing Cash Flow During Inflation 

One of the most common reasons a business fails is due to lack of cash flow. Consistent cash flow is crucial to smoothly run a business and invest in new opportunities. Rising inflation can further add to the stress of maintaining a healthy cash flow. To improve cash flow during these times, you may want to start by reducing expenses. It would be beneficial to take a look at your monthly expenses and cut or reduce any expenses that are unnecessary. For any necessary expenses or contract you are in, you may be able to negotiate the price or find less expensive alternatives to preserve your cash flow. Additionally, encouraging your customers to pay faster will also help your cash flow. You can offer incentives for early payment, request an upfront deposit, or turn to an alternative financing company that will advance you a percentage of your customer’s invoices and handle the payment process for you.    

 

Controlling Demand  

During a rise of inflation, consumers will likely cut back on non-essential goods and services in attempt to save money. Not all businesses face an immediate fall during this period, but consumers may be hesitant to make larger purchases or opt for a cheaper alternative. Consequently, businesses may see a reduction in demand or a decrease in sales revenue. Keep this in mind when purchasing inventory to reduce waste and maintain efficiency.  

 

To manage your business during inflation, evaluate the demand to reduce waste of products.

Evaluate consumer demand to reduce or prevent waste.

 

Strategically Pricing Goods & Services 

It may be necessary to raise your prices to keep pace with inflation. However, if raised too much, this may repel consumers from purchasing your products. Instead, consider raising prices in small increments as inflation rises. Many consumers will expect a rise in prices, but slowly increasing them may keep them from looking for alternatives. Alternatively, if you have enough savings and feel comfortable enough to not raise prices, this could further help uphold the relationship with your customers. Consider the 4 C’s of pricing strategy: customers, costs, competitors, and cash. Ask yourself, how important is the pricing of your products to a customer? How has inflation affected your supply or labor costs? Has your competition increased prices? What is your current cash flow?  

 

Improving Collection Methods 

Another way to manage your business during inflation is to consider automating some tasks. There are many applications and services available for affordable prices that will help you automate any repetitive or small processes. You can simplify workflow with the use of technology which will allow for your employees to focus on different tasks. With warehouse automation, you can move inventory in, within, and out of warehouses with technology and little to no human assistance. Automating tasks can improve productivity and cut back on small expenses.  

What is EIDL? 

Businesses across the country were devastated by the Covid-19 pandemic and were in desperate need of working capital to stay afloat. The U.S. government offered a multitude of financial services to help businesses during these challenging times, one of which was an EIDL, or a Covid-19 Economic Injury Disaster Loan.  

 

EIDL loans, funded by the U.S. Small Business Administration (“SBA”) were intended to help small businesses recover from the hardships of the pandemic. They were intended to be used by small businesses to cover operating expenses and were made appealing to them with accessible and borrower-friendly terms. The EIDL program offered two funding options: loans or advances. 

 

What is the difference between EIDL loans and advances? 

EIDL loans were low-interest, long-term, fixed-rate loans. The interest rate was 3.75% per annum for businesses, and 2.75% per annum for nonprofits, both with a 30-year term, with payments deferred for the first two years.  

 

The maximum EIDL loan amount was $2 million, and collateral was required for loans over $25,000, as was a personal guaranty (“PG”) for loans over $200,000. In addition to favorable terms, another benefit of EIDL loans was the relatively attainable requirements. For loans of under $500,000, the credit score requirement was 570. For over $500,000, it was 625. 

 

Different than traditional small business loans, EIDL advances did not need to be repaid. In this respect, they were like grants. Because of these extremely favorable terms, EIDL advances were far more difficult to qualify for. They were reserved for businesses hit hardest by the pandemic and were for significantly less money than loans. To be eligible for an advance of up to $10,000, applicants had to be in a low-income community, have less than 300 employees and have experienced at least a 30% reduction in revenue during the pandemic. Additional advances of up to $5,000 were available to businesses with 50% revenue reductions with fewer than 10 employees.  

 

Given the unprecedented degree of difficulty that all U.S. businesses were facing in the early stages of the pandemic, many of them were eager to jump on the opportunity for an EIDL loan or advance. Through April 28, 2022, nearly four million EIDL loans were approved for over a whopping $378 billion! The EIDL advance program was robust as well, with about 600,000 advances funded for over $6 billion, and approximately 450,000 supplemental target advances for over an additional $2 billion. 

 

EIDL loans can help small business recover from external hardships.

Can I still apply for this loan? What other options are available? 

 

Unfortunately, the SBA is no longer offering new EIDL loans as of January 1, 2022. The SBA also stopped evaluating increased requests and closed the online portal in May 2022. However, if you already received an EIDL loan and want records of documents, you may contact the SBA directly. So how else can a small business, still recovering from the pandemic and now faced with the problem of high inflation, get funding? The SBA still offers a suite of traditional loan options. These loan options have competitive terms but also drawbacks, such as a slow approval process. Traditional bank loans are also a consideration for many small businesses but can be inaccessible due to the strict credit requirements.  

 

In contrast, alternative financing offers financing services with less strict requirements. It can also be funded in as little as 24 hours! 

 

One financing service that can be a great fit for businesses is invoice factoring. With invoice factoring, a company like CapFlow Funding will buy the right to collect your outstanding invoice. They will pay you the value of the invoice upfront at a slight discount. With invoice factoring, you can get working capital without having to wait months before an invoice would typically be paid. Invoice factoring is also less expensive than other types of alternative funding like a merchant cash advance. It will not leave you in debt. The knowledgeable team at CapFlow Funding will work with your company to form an efficient and effective funding plan.

Oftentimes, a company that relies on collecting payments from their customers can benefit from access to liquid funds immediately after the invoice is issued. After all, they need the cash flow to cover payroll, operating expenses, and to get started on fulfilling the next round of orders. Fortunately, the invoice factoring process exists as a financial product to help your business run smoothly, despite outstanding invoices and their specific payment terms. With invoice factoring, an alternative financing company, such as CapFlow Funding, will purchase your company’s outstanding invoices and fund you the value of those invoices at a small discount.

 

Invoice factoring has several benefits compared to other sources of funding that are available to businesses.  

In comparison to a traditional bank loan, alternative funding sources like invoice factoring are far more attainable, and generally come with a cheaper cost of capital.  

The factoring company will collect invoices from your customers directly.  A factoring company will also consider your customer’s financials, not your credit rating as a deciding factor. Furthermore, compared to other alternative financing sources such as a merchant cash advance, invoice factoring is a significantly cheaper option, and effectively provides working capital all the same. With invoice factoring, as opposed to a merchant cash advance, there is less risk for your business, as you do not need to rely on having consistent revenue to make debt payments on a daily or weekly debit. Instead, you are simply getting paid for your invoices sooner!  

Knowing that invoice factoring is a great option for your company, let us take a look at how the process works, and how CapFlow Funding can form a strong partnership with your business through factoring. 

 

Partnerships with factoring companies allow for businesses to network and get cash faster. The invoice factoring process can be done more smoothly when a business partners with a factoring company.

Build a strong partnership with an alternative lender like CapFlow.

 

Here is what a typical round of the invoice factoring process could look like. 

Invoice factoring with CapFlow Funding offers valuable flexibility for your company. All outstanding invoices are eligible for factoring. Provided that they are greater than $500.00, have payment terms that are less than 90 days, and are no older than 30 days upon receipt. Upon signing a contract with CapFlow Funding Group, submit the relevant invoices and supporting documentation. You will receive a large percentage of the total invoice amount submitted. This gives your business an immediate influx of funds without having to wait for your customers to send payment. You then have complete discretion over how to best use those funds to help your company grow.

The advance payment is typically around 80% of the invoice’s value. The remaining 20% will be returned once the invoice is paid off, minus fees. With CapFlow Funding, fees can be approximately 3%. This is significantly less than the factor rates for a merchant cash advance, which can range between 1.2 and 1.5. 

 

By taking ownership of your outstanding invoices, CapFlow Funding becomes a strategic partner with your company.  

Both sides benefit when your business thrives and grows. The account executives at CapFlow Funding will work with you to form the best partnership possible. With their wealth of experience and knowledge, they can offer guidance on various matters regarding your business. They can also customize your contract. For example, setting up an escrow account if it’s a good fit for your company. Invoice factoring is a great service to get your business working capital. Account executives at CapFlow Funding Group will prove to be great partners in making your company more capital efficient.  

What Is a PPP loan?  

Due to COVID-19, many businesses faced an economic disruption and were forced to temporarily close. This put their employees’ paychecks in jeopardy. To provide support for these businesses and to ensure no disruption to employees’ paychecks, the U.S. Small Business Administration (SBA) began issuing Paycheck Protection Program (PPP) loans. The PPP loan aimed for small businesses to keep workers on payroll or rehire workers that were laid off due to COVID-19. Other PPP qualified expenses include electricity, gas, water, transportation, rent and more that are related to COVID-19 relief efforts. The PPP program ended on May 31, 2021. However, it is important to stay educated on what a PPP loan is. This can be beneficial in the event where another opportunity arises or for you to be aware of your other options. 

 

Are You Eligible for a PPP Loan? 

The Paycheck Protection Program loan has been available for all businesses with 500 or fewer employees (with some exceptions to more employees). This included , but did not limit to nonprofits, self-employed individuals, independent contractors, sole proprietorships, food services and veteran organizations. Other eligibility terms provided by the SBA states that your business was operational before or starting on February 15, 2020, and that your business is currently open and operating again.  

Learn about eligibility and requirements for a PPP loan.

Understand the different benefits a PPP loan can provide.

How Can It Benefit Your Business? 

Trying to get back on your feet during a global pandemic is extremely difficult. Taking out a loan can be discouraging and a scary decision to make. Fortunately, the PPP loan has benefits that many other loans do not. This makes it easier for you to get back on your feet. For example, the PPP interest rate is only 1% per year and you can apply for loan forgiveness within ten months from the end of your covered period. As long as you follow the specific guidelines on spending your PPP loan, you can achieve 100% loan forgiveness. PPP loans do not require any collateral and can give your business the support and capital it needs to continue growing strong.  

 

What to Do If You Cannot Obtain a PPP Loan 

Overall, a PPP loan can be a great option to keep your business moving. Staying on top of your finances is essential for a long-lasting successful business. If you find yourself disqualified from any of these terms or if you miss the deadlines, do not worry. You can explore support from alternative funding companies like CapFlow Funding Group, and still attain working capital. CapFlow Funding Group provides businesses an immediate influx of working capital. We offer companies the opportunity to bypass the wait of getting invoices paid. If you are experiencing a slow time due to COVID-19 or want to continue growing your business, this can be an advantageous for you. CapFlow has provided $1 billion in working capital to businesses and you can be part of that!  

What is a small business loan? 

A small business loan is a loan that is partially guaranteed by the government and offered by banks and other lenders in partnership with the Small Business Adminstration (“SBA”). They are offered to small businesses to help with any working capital needs and can be used to help cover any expansion or startup costs. Traditionally, when small businesses were looking for financing, the first place they would turn to was to their bank. As more options have come about, bank loans now have a reputation for being difficult to qualify for and being slow to fund in comparison to other alternative financing options 

 

Small Business Loan Application Process 

The application process for a small business loan from a bank can be a bit stressful and discouraging. The SBA minimum requires for a business loan to be defined as a “small business.” According to the SBA, a small business has fewer than 1,500 employees. Additionally, they must make no more than $38.5 million in annual revenue.  You must also operate for profit, invest your own finances into the business before seeking assistance, have good credit, and do business in the United States. If you check all these boxes and any other requirements specific to the loan you are applying for, the process from approval to funding usually takes from thirty days to multiple months.  

 

The small business loan application process tends to be done online and can be lengthy and complicated.

The small business loan application process tends to be extensive.

 

Types of small business loans  

7a loan 

A 7a loan is the most common business loan the SBA offers. This loan will be used for working capital, purchasing real estate, refinancing existing business debt, and more. The maximum loan amount is $5 million, and most term loans are repaid with monthly payments. However, these loans require a whole checklist of items to submit in your application. Some of these items include a borrower information form, financial statements, a detailed list of any affiliates, a business license, loan application history, a business overview and more. Unfortunately, even after the lengthy application process, it is quite difficult to qualify and can typically take 60-90 days to be approved.  

 

504 loan 

A 504 loan is a loan offered by the SBA and provides long-term, fixed rate financing for small businesses. Along with the minimum requirements mentioned above, your business must have a tangible net worth of less than $15 million and have less than a $5 million average net income after taxes. This loan is specifically given to promote jobs and growth. Therefore, it can be used to build new infrastructures or make improvements on existing ones.  

 

Microloans 

A microloan provides up to $50,000 for small businesses and can be used for working capital, inventory, fixtures, and more. The maximum repayment term is six years and interest rates vary from 8-13%. Other than the SBA minimum requirements, eligibility varies by lender and all set terms are also decided by these lenders.  

  

Businesses need to weigh their options to consider if any SBA loans are right for them.

Determine which, if any, SBA loan is right for your business or explore other options.

 

Consider options other than a small business loan  

If you are a small business in need of financing, but do not want to go through the lengthy, complicated process or are not eligible for a small business loan, you still have multiple options. You may apply for alternative finance which includes invoice factoring, merchant cash advance, purchase order financing, revenue-based financing, and more. These alternative options require minimal paperwork for an application. If approved, businesses can often get working capital within twenty-four hours. At CapFlow Funding, we work with you to ensure you receive the financing that is best for your company. Without having to wait months to get it.