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Article: What is Invoice Factoring?

Invoice factoring is a tool that allows you to finance your open invoices from slow-paying, but creditworthy, commercial and government customers – improving your cash flow and enabling you to offer payment terms to customers.

Can invoice factoring help you?

Offering commercial clients the option to pay invoices in up to eight weeks is a common business practice. However, it can create serious cash flow problems for companies that are not prepared to wait up to two months for an invoice to pay. Financing invoices can solve these problems and improve your cash flow. Invoice factoring bridges the gap between invoicing a client and getting paid, and it helps you offer terms to customers without the associated financial problems. When used correctly, this tool can bring stability and enable growth.

Transaction structure

Most transactions involve a factoring company purchasing the financial rights to the invoices you want to fund. They pay you for the invoice immediately, while they wait to get paid by your customers. The transaction concludes when your customers pay in full, on their regular payment schedule.

Most invoices are financed using two installment payments. The first installment – the advance – covers about 85% of the gross invoice value and is provided when the finance company buys the invoice. The size of the advance varies based on the risk profile of the transaction. The second installment – the rebate – covers the remaining 15%, less fees, and is provided as soon as your client pays the invoice in full.

For more details about the structure of a factoring transaction, please read “How does factoring work?

Are advances negotiable?

The size of the advance is one of the main concerns for prospects. For many companies, a larger advance is better since it improves their financial position. Advances range from 70% to 95%. The advance is determined by:

  • The number of clients and invoices you want to finance
  • The credit quality of your clients
  • The strength of your billing procedures
  • Any individual risks associated with your company or industry

Most companies qualify for advances in the 75% to 85% range. The exceptions to this rule are the transportation, staffing, construction, and medical industries. The average advance by industry is as follows:

How much does invoice factoring cost?

The rate is determined by the same criteria used to determine the size of the advance. In general, rates range from 1.5% to 3.5% for every 30 days. Because of its cost, this solution is best suited for companies with gross profit margins higher than 15%.

Can you qualify?

Qualifying for invoice factoring is easier than qualifying for most conventional business financing solutions. The most important requirements include:

  1. Your clients must have good commercial credit
  2. Your invoices must be free of encumbrances/liens
  3. Your company must not have serious legal and tax problems
  4. Company owners must have industry experience

How quickly can you get invoice factoring?

We can usually provide a proposal within one business day of receiving a full application package. If accepted, most clients can receive their initial funding in a matter of days. Subsequent funding can occur in about one business day.

Would you like an instant quote?

We offer factoring plans with high advances and low rates. Get an instant quote, or call (877) 300 3258 to speak to an expert.

 

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