Invoice factoring, an alternative source of business funding, has been gaining traction in recent years. It’s becoming a popular solution because it solves three key problems:
- It can improve your cash flow
- It can enable you to provide payment terms to your clients
- It provides a stable platform that can be used for growth
However, not every company can benefit from this type of financing because factoring solves a very specific problem. And while it solves this problem extremely well, it is only suited to solve this problem.
Is this you?
Do you own a small company who works with larger companies that pay their invoices in up to 60 days? This is a common problem for many small business owners who must offer terms or risk losing clients. The problem is that waiting for payment can be challenging. Most small companies have not built extensive financial reserves and must rely on prompt invoice payments to meet their own expenses.
While it’s good to run a lean company, some companies are so lean in their reserves that a couple of late payments can impact their ability to pay their own expenses, such as payroll or suppliers. Before long, these financial problem ripple through the whole company affecting your ability to run the business. These cash flow problems can be insidious and grow rapidly – sometimes past the point of no return.
How will an invoice factoring company help?
Factoring financing companies can solve the root cause of this common cash flow problem. Basically, you need quick payment on your invoices but have clients that demand to pay slowly.
The finance company can solve this problem and provide an advance on your slow-paying invoices. This solution accelerates revenues that were locked in slow-paying invoices. As a result, your cash flow improves, you can pay your expenses, and, more importantly, you can start offering payment terms with confidence.
Who can work with a factoring company?
Most factoring companies work with small to mid-sized businesses who sell to corporate or government clients. The most important requirement for this type of funding is to have quality invoices payable by creditworthy clients because your invoices are the collateral that backs the transaction. Aside from this requirement, your invoices must not be encumbered by liens and your company must not have legal problems.
How does a factoring company structure a transaction?
Most companies structure transactions by financing your invoices in two installments. The first installment – the advance – covers about 85% of the gross value of your invoice. The second payment – provided when the client actually pays for the invoice – covers the remaining 15%, less a transaction fee. While some industries may qualify for higher advances (such as transportation and staffing), they generally follow the same funding model.
Most transactions are structured as recourse or non-recourse transactions. In a recourse transaction, the factor can return the invoice to your company if it’s not paid within 90 days. In theory, when you structure a non-recourse transaction, the factor cannot return the invoice to you if the invoice is not paid.
In practice, however, non-recourse is applied only if the non-payment is due to a bankruptcy from your customer within the 90- day finance period. This last detail is critical. If your customer does not pay because of a dispute, you usually need to make the factor whole. Each factor offers the service in its own way, so you should hire an attorney to help you understand how your transaction is structured.
Factoring your invoices can be an ideal solution if your company has cash flow problems because your clients pay slowly. Invoice factoring provides a solid financial base that can be used as a platform for growth.
Get more information
We can provide you with a competitive factoring terms. For more information, get an online quote or call (877) 300 3258.