How Does Invoice Factoring Work?
Invoice factoring, also referred to as selling invoices or selling accounts receivables, refers to a process where companies offer open invoices for sale to an invoice factoring company. The account receivable finance company, or factor, assigns a value to the invoice portfolio based on the ability it has to collect, the industry they serve, the credit reputation of the debtors, and the total amount due before offering a factoring and advance rate for the invoices.
If the valuation is deemed fair by the company selling the invoices, the transaction is closed. By selling invoices, companies can focus on their main tasks: creating more products and finding new customers, rather than dealing with the frustration of chasing down money from sales that have already been made. So if your business has invoices that are not only weighing down your balance sheet but are costing you time, money and effort to try and collect, consider selling these invoices to an experienced accounts receivable finance company.
Invoice Factoring For Cash Flow Needs
One of the most important things businesses need in order to keep the business cycle going is cash. 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 going by providing the necessary cash to be able to fulfill orders without adding debt to the balance sheet.
Benefits of Factoring Companies
When a business needs cash in order to make a sale, they have a few options. First, they can go to the bank and apply for a business loan. Second, they can turn to their principle owners or investors to offer additional cash to cover the deficit. Or third, they can sell their open invoices to an invoice factoring company in order to raise the cash. Applying for a loan can be tough on a business, especially newer ones that either don’t have the requisite number of years in business or the established business credit to be able to qualify for a loan. And getting a capital infusion from the principle owners or investors can be a time consuming venture that may not pan out and requires offering more of their company ownership. When a company decides to factor its invoices, it first looks for factoring companies that serve their industry. They review their existing invoices to determine which ones they can sell in order to cover the cash shortfall they have. This is the easiest and fastest way to inject cash into a company.
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 (AR) and provides 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 timely process and affect your company’s credit and your personal credit. When you research invoice factoring companies like ours, 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 AR. You will not have to fill out complicated forms nor will you 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. Why let cash flow problems bog you down when you have a simple, financial tool at your disposal?
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 variables may affect rates.
Variables that affect invoice factoring rates
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 many variables, such as: a company’s sales volume, the credit strength of its clients, payment cycle trends in the subject industry, invoice amounts and the overall climate of the subject’s 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 the few minutes to fill out a simple one-page 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.
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.
“If they just provided the cash, I could double my business!”
Banks, though, do not look so much at growth potential as they do number of years in operation. Banks look at hard assets, real estate and equipment that can be used as collateral. Simply put, banks lend against things you own.
That works great for companies with a long history of outstanding performance and flawless balance sheets.
If a company hasn’t been in business long, is in a growth phase or in the process of a turnaround, though, there may not be much for a bank to look at.
Few assets plus a short track record equals no cash.
But, let’s look at this from a factoring perspective.
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. Universal loves to look at a company’s growth potential and listen to the passion of the business owner as he or she explains what could be done with immediate cash.
Many factoring clients are companies that haven’t been in business long, or started out that way, but have since experienced vast growth and many years of 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 too.
What Will My Customers Think of Invoice Factoring?
One of the first questions a business owner will ask when deciding whether or not to factor invoices is, “What will my customers think?”
That is a valid question and one that invokes more fear than needed.
The truth is, this is one of those worries that is really not an issue.
Invoice factoring, or accounts receivables financing, reveals intelligence and flexibility in dealing with a challenging economic climate. It is normal for a smart business to have multiple lines of credit, right?
Of course it is. And factoring could be thought of as nothing more than another line of credit. It provides money much faster, with significantly less paperwork, than traditional bank loans. In fact, having a factoring arrangement can even give you an edge over competitors. When you factor, you will be able to manage your cash flow and avoid cash crunches when the unexpected happens.
And, truthfully, many of your customers, especially larger ones, are already aware of factoring because they use it too.
Many small, mid-size and large companies use factoring to increase their liquidity and control cash flow. Smart CEOs and owners use factoring as part of a growth strategy; especially when sales increase too fast for a traditional bank to finance.
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.
If you remain nervous about what to say to a customer about your factoring decision, tell them you’ve chosen to factor your invoices to keep up with growth. You can take the opportunity to explain that factoring is an important step for your business and will allow you to continue providing your customers with the great service they have come to expect.
After all, they will still deal with you and your company just as they have in the past. For your customers, the only real change will be the remit-to address on the invoice. Hardly a big deal!
If you still have concerns, contact Universal Funding today. Our experts can discuss ways to inform your customers and make factoring work positively for you; and them.
End your search for invoice factoring companies today and contact Universal Funding for the financial assistance you need for your business, give us a call today at 1-800-405-6035 or submit a rate form for one of our Business Development Specialist to follow-up with you.