For small businesses that depend on the payment of invoices for revenue, maintaining a consistent cash flow can be a challenge. It can take 30, 60, or 90 days for invoices to be paid and even longer when dealing with government agencies or large corporations who typically require extended terms. You may be fortunate and receive most of your payments in a timely manner but it only takes a few late payments or extended terms accounts to disrupt your cash flow. Invoice funding or factoring can be extremely beneficial for a small business owner trying to keep all of their operating expenses current while waiting on invoices to be paid. It is important to understand how this type of funding works and how to choose the right factoring provider for your business.
Invoice Funding Explained
So how does invoice funding work? Basically, once you’ve invoiced your customer, you can sell that invoice to a factoring company to receive payment without the long wait. Your customer will then pay the factoring company when the invoice is due. This type of funding can provide a small business with quicker access to funds from their outstanding invoices, allowing them to cover daily operating expenses, handle an emergency or even take on an unexpected business opportunity.
Factoring providers, commonly referred to as factors, typically purchase invoices issued to customers with good credit and payment histories for 70 – 90 percent of their face value. Once the invoice has been paid, the factor will reimburse this issuing business minus a factoring fee.
While it is important to keep in mind that invoice factoring may be a bit more expensive than traditional bank financing, it can provide working capital when you need it. Applying for a bank loan can be a lengthy process and in many cases, these applications are declined. A small business that has been declined for bank financing can still qualify for invoice factoring.
Choosing a Factoring Company
Shopping for a factor, especially if you’re considering invoice factoring for the first time, can be a little overwhelming. There are some important points to be aware of when choosing a factor for your small business.
Make sure the terms and fees are clearly explained and don’t be afraid to ask questions. If you find a factoring provider advertising unbelievably low factoring rates – be cautious and dig deeper. There are probably hidden fees involved.
The advance rate is the percentage of the invoice you, the business owner, will receive upfront. As previously mentioned, the average is 70 to 90 percent. For example, if the invoice is for $2000.00, you should receive an advance of between$1400.00 and $1800.00.
Many factoring companies require that you commit to a contract. The duration of the contract will vary and often feature lower factoring rates for longer commitments. This can be beneficial if your need for factoring will exist for the duration of the contact. Just make sure the terms of the contract are clearly spelled out and work for your company’s particular situation. Early cancellation fees can be expensive, and could ultimately harm rather than help your cash flow.
When factoring invoices, many factors will notify your customers and require that payments be made to an account in the factoring company’s name. It is important to understand how this is handled. In an effort to maintain good customer relations, you may want to initially be part of the process.
As with any type of financing, be sure to read and understand all the fine print. When utilized properly, invoice factoring can be the perfect solution for a small business in need of quick, short-term funding.
Considering Invoice Factoring?
CapFlow Funding Group will work with you to find the best funding solution to provide your business with immediate working capital. We service many different industries with a variety of different funding needs. Contact us today and find out how invoice factoring can help grow your small business.