If you’re like other small businesses owners, your company’s cash flow always seems to need a boost. Small business loans from banks, if possible, take too long. An effective, fast way to obtain business financing is Invoice Factoring. Invoice Factoring is not a loan. It’s the sale of accounts receivable.
Due to its specific nature, invoice factoring is not for every business. It’s ideal for industries with long accounts receivable periods such as manufacturing, and suppliers in food, hospitality and raw materials industries, as well as freight transport and staffing agencies.
Typically, small business in these industries find it difficult to compete with the big players because they are expected to offer long payment terms to customers. Not offering normal credit or asking to be paid early is not a viable business strategy. What is effective, however, is receiving the cash that’s due on those invoices upfront from a third party.
The third party, called a factoring company, purchases your accounts receivables and advances you up to 80% of the value of the invoices. The invoice factoring company will wait for your clients to fulfil the payment terms and then pay you the remaining balance, minus their factoring fee, which may range between 3-5%.
A short answer to the question of “What are invoice factoring companies” is to consider what they are not. Take a minute to think about collections agencies. They are notorious for using practically any means necessary to get paid. That’s absolutely not the kind of company you’d like to interact on your behalf with your valued customers. This brings us to:
Fact #1: Invoice Factoring companies are not collections agencies and therefore should not conduct business is any similar manner.
Fact #2 Invoice factoring is not a loan, so it can’t be assessed using the same parameters used to evaluate the affordability of a loan. When receiving a cash advance from factoring invoices, you don’t pay an interest rate over a long period of time. You pay an agreed upon fee for the cash. Invoice factoring is a purchase of collateral (your invoices) at a discounted rate. The funds advanced to you for the purchase are also repaid very quickly to the factoring company—usually within 90 days. The entire process from start to finish is fast. That stated, look for an invoice factoring company that can get you the cash within 24 hours if that’s what you need.
Fact #3 Choose a factoring company that will treat your debtors like their own valued customers.
Goal #1 Get you the cash you need fast to keep your cash flow positive
Goal #2 Preserve your client relationships to ensure your business’s ongoing success
Seek an invoice factoring company with an established reputation and verifiable satisfied customers. A successful invoice factoring company should aim to develop a long-term relationship with your company.
It’s also important for you to manage expectations. Since a factoring company is NOT a collections agency, they will purchase invoices that are likely to be paid. That means usually invoices that are not more than 60 days past due or are within their terms are eligible. Additionally, the creditworthiness of your debtors influences whether or not your invoices will be purchased and the amount of the fees you must pay for the factoring service. The good news about this is your credit score does not play a role in your ability to factor invoices.
Choose a factoring company that will submit the original invoice to your customer for the most seamless experience as possible. You’ll also want to have a process in place to notify your customers ahead of time that their invoices have been sold. Either you can contact them yourself or make sure that your invoice factoring company has a best practice that they use, such as a professional letter of introduction and explanation of who they are.
Remember, since most factoring companies will only accept new invoices and invoices from creditworthy clients, it’s important to protect your relationship with these very high value customers. Additionally, in cases when your customers are not even late making their payment, you cannot afford to inconvenience them just because you want to be paid earlier.
Typical situations that make Invoice Factoring an attractive solution include overcoming short-term cash flow problems, a need for working capital without taking out a loan, and a quick need for business cash infusion.
Greenbox Capital offers fast and flexible invoice factoring services.
To get started, complete our application and provide 3 months of bank statements, the invoices to be factored, and contact information for your accounts receivable manager.