What is Invoice Factoring?
Invoice factoring is a quick financing option for businesses who may be waiting for their customers to pay their invoices for 30, 60 or 90 days. With invoice factoring, also called accounts receivable financing, business owners are able to sell unpaid invoices for immediate access to working capital. Once approved, you typically receive the funds within a few business days. The factoring company buying the invoice will deduct its fee from your proceeds–Universal Funding’s fee can be as low as 0.55%. They will typically advance from 80 – 95% of your accounts receivable.
Factoring rates can vary from below one percent to over five percent of the face value of the receivable. When a factoring company reviews an application to determine the factoring rate, it takes into consideration variables such as: a company’s sales volume, the credit strength of its clients, payment cycle trends in your industry, invoice amounts, and overall climate of your industry.
If you choose to factor invoices, you need to find a factoring company and sell the face value of your customer invoices. The factoring company then assumes collection from your customers. Before approving you for accounts receivable financing, the factoring company will run a credit check and possibly contact references for your customers to ensure creditworthiness.
The Universal Funding team takes great pride in helping businesses just like yours. We make sure your questions are answered and your needs are met quickly so you keep your focus on growing your business.
How Does Invoice Factoring Work?
As you explore whether factoring invoices is right for your business, you’ll want to learn more about the process that is involved. You’ll want to understand what is factoring, what your role is, and how it will affect your customers.
By selling invoices, companies can focus on more important issues such as creating more products and finding new customers, rather than dealing with the frustration of chasing down payment from sales that have already been made. If your business has invoices that are not only weighing down your balance sheet, but are costing you time, money and effort to collect, consider selling these invoices to an experienced invoice factoring company.
Is Invoice Factoring a Loan?
Invoice factoring is the financing of your accounts receivable (AR). A factoring company buys your sales invoices from you, less a small finance fee. This means you get your money immediately rather than having to wait for 30, 60, or 90 days for the customer to pay. You also do not incur debt with factoring, so it does not show up on your balance sheet.
A term loan is the typical business short-term loan that you would get from a bank. Once approved, the bank will advance you with a fixed amount of money. And you will repay that loan, plus the interest, in regular, equal installments.
Invoice factoring and term loans are more suited to some purposes than others. Bank loans are usually best for one-off purposes, such as acquiring new equipment or funding fixed assets. On the other hand, factoring is best for reducing the working capital cycle. Most importantly, invoice factoring frees up the cash tied up in accounts receivables, so it makes cash flow more predictable.
Is Invoice Factoring Right for Your Business?
Invoice factoring converts your accounts receivable into working capital without creating debt or adding liability. Factoring does not rely on your credit rating, collateral, or bringing in investors, so companies that have faced previous cash flow challenges more easily qualify for funding.
When you work with a factoring company, you are not restricted in how you use the funds like many traditional financial institutions. You can use the funds to cover payroll and other payments vital to your business. And, you can use it as the need arises without having to reapply. Selling your accounts receivable offers you a flexible form a financing that scales with the growth of your businesses without lengthy paperwork.
Is Invoice Factoring Right for Your Business?
The Pros and Cons of Invoice Factoring for an Expanding Business
How Invoice Factoring Improves Cash Flow
What are the Benefits of Factoring Companies?
Smart business owners are always looking for ways to improve their cash flow. Some have realized the effectiveness of working with invoice factoring companies. Factoring companies purchase the accounts receivable (A/R) and provide business owners with necessary cash to pay for expenses such as payroll, inventory, office supplies, marketing, advertising and even taxes. While you could go to a bank for financing, when you do, you incur debt. It could also be a more time intensive process effecting your company’s credit as well as your personal credit. When you research invoice factoring companies, like Universal Funding, you will soon discover the many benefits of factoring receivables including how fast we provide you with cash on a high percentage of the balance due on your A/R. You will not have to fill out unnecessary, complicated forms or have to wait an extraordinary amount of time before you get your answer.
Instead of sending statements and reminders to customers who fall behind on their payments, you can spend your time growing your business and planning for the future. Don’t let cash flow problems bog you down when you have a simple and fast financial tool at your disposal.
A Fast Financial Solution
Cash is one of the most important things businesses need in order to keep the business cycle going. When businesses choose to offer goods and services on credit in order to entice new customers to make purchases, they often find themselves in a cash flow pinch. Invoice factoring for business cash flow needs is a great way to keep the business cycle moving by providing the necessary cash to fulfill orders without adding debt to the balance sheet.
What are Factoring Rates?
When a company considers factoring its receivables, one of the initial questions has to do with accounts receivable factoring rates and advance rates. Unlike other industries, accounts receivable factoring rates are not determined by a credit score and can’t be quoted over the phone without first answering a number of basic questions to determine which may affect rates.
What Variables Effect Invoice Factoring Rates?
Rates can vary from below 1 percent to over 5 percent of the face value of the receivable. When a factoring company reviews an application to determine the factoring rate, it takes into consideration variables such as: a company’s sales volume, the credit strength of its clients, payment cycle trends in your industry, invoice amounts, and overall climate of your industry. Another item that can affect the rate is the existence or the opportunity for accounts receivable insurance. A company’s credit score or the number of years it has been in business aren’t major variables that influence rates.
How to get Accurate Quotes for Invoice Factoring Rates
Ultimately, the best way to truly know what rates your company can receive is to take a few minutes to fill out a simple one-page rate form. While that’s all it takes to get the process started, keep in mind that any quote given is simply a starting point. Factoring companies can’t guarantee any quote until all requested documents have been provided and all information has been verified.
How Quickly Can I Get Funding?
Another important consideration is how quickly you can receive funding, and this may matter to you more than anything else if you need cash to make payroll, funds to purchase supplies for a large order or to buy something essential for your business. With invoice factoring, you can qualify as quickly as two to seven days and be funded in as little as 24 hours after that.
Why Banks Decline and Factors Approve
It happens all the time: A factor will get a call from a company that needs business financing but was recently declined by a bank. These potential clients are fed up with the process of applying for financing and do not understand why banks don’t see the same growth potential the business owner does.
Banks, though, do not look so much at growth potential as they do number of years in operation, hard assets, real estate and equipment that can be used as collateral. Essentially, banks lend against things you own. That works great for companies with a long history of outstanding performance and impeccable balance sheets. If a company hasn’t been in business long, is in a growth phase or in the process of a turnaround, there may not be much for a bank to look at. Few assets plus a short track record equals no cash.
What will my Customers Think of Invoice Factoring?
The team at Universal Funding is highly professional and protective of your relationship with your customers. Many of your larger customers are already aware of factoring, as they are likely using it for their cash flow needs as well. Your customers can even benefit when you factor because they can choose to take advantage of payment terms that might not otherwise be offered to them. Once you’ve decided to factor you invoices, you can simply let your customers know that it is an important step for you business to keep up with growth while continuing to provide them with the same great service they have come to expect.
When you employ the services of a factoring company, the administrative change for customers is minimal. The only difference is that they will pay the factoring company instead of sending payment to you. However, you will want to reduce the risk of payments being sent to the wrong place. So, it is best to advise customers about the change in advance.
A letter to your customer’s accounts payable department will usually suffice. In that letter, you need to advise the customer that you will be factoring your invoices. And you need to specify a date for the change and provide the new payment details.
If you are concerned that customers might have the wrong impression of factoring, you might want to explain the move. For example, you are outsourcing your accounts receivable to improve efficiency and save administration costs. And you could point out that factoring will provide working capital for expansion. However, most people are familiar with the many benefits of factoring.
Funding That Grows as Your Business Grows
When those prospective clients call and express their frustration with the financing process, a factoring company, such as Universal Funding, can often put them at ease and explain how it can help. Many factoring clients are companies that haven’t been in business for long, or started out that way, but have since experienced fast growth profitability. Watching clients grow is proof that factoring works. Plus, a company that factors will never outgrow its financing. As the company grows, its line of financing grows along with it.