Waiting to get paid by your clients and customers can be one of the most stressful frustrations that comes with owning a business. That is especially true if you have to wait a month or more in order for that payment to arrive.Long delays in payment can lead to major deficiencies in the cash flow of your business, which can cause you to fall seriously behind in crucial expenses such as your payroll, your inventory, or your rent. Of course, this can prevent your business from growing when it should be seriously flourishing.That’s where invoice factoring with businesses such as ezinvoicefactoring.com comes in.
Invoice factoring is a form of financing that allows small and medium-sized businesses to get valuable cash advances based on the value of their accounts receivable. So, instead of having to wait for weeks or months to get the money that is owed to you, you can get paid much quicker so that you can maintain your business flow as usual with the money that is owed to you.
If you are interested in figuring out how to choose the right company to work with when it comes to invoice factoring, we have broken down the major facts about invoice factoring that you will want to know.
What exactly is invoice factoring?
Certainly, the first thing that you will want to know about invoice factoring is exactly what it is and how it can help your business flourish.
Essentially, invoice factoring is a basic financial agreement and transaction in which a business (that’s you) sells its account receivables (that’s your invoices) at a discounted price to a financing company that is known as a factoring or factoring company.
Factoring companies typically advance up to 90 percent of your total invoice to you upfront. When you pay the total invoice amount, including the initial fee, you receive the percentage as your reimbursement.
When considering invoice factoring, it is frequently referred to as account receivable factoring.
How does invoice factoring work?
The very first step in invoice factoring begins when you decide which factoring company you want to work with. You’ll need to do research to ensure that the factoring company you choose has experience, great reviews, and affordable rates.
You can sell invoices for working capital to grow your business. Factoring companies pay 70–90% of the invoice value. When the invoice is paid in full, the processing of the remaining amounts will begin.
Overall, there are typically three different groups that play a role in every invoice-factoring agreement. In this scenario, I am the business or the invoice holder. The second is your customers, those who owe money on their invoices. The third is the factoring company, the company that supplies the cash and then sets out to complete your invoices.
Major steps of invoice factoring
Just like every other important financial transaction, it is heavily important that you know the ins and outs of every step of invoice factoring. We’ve broken down those steps for you so that you can feel confident about knowing the basic information related to invoice factoring.
In all, there are six major steps to invoice factoring. They are as follows:
- You issue an invoice with net terms after delivering your product or service to customers.
- The company then “sells” that invoice to the factoring company
- What your business gets back is an advance payment based on the value of those invoices, typically equaling somewhere between 70 and 90 percent of the total value of those invoices
- Now that you have that cash in hand, you can use it pay bills, restock your inventory, grow your business, or do whatever you want
- The customer pays the invoice, and your business gets a rebate minus a fee based on the contract term and invoice value.
- Ultimately, all three parties involved are able to benefit from the agreement. The customer receives cash upfront, their client gets favorable terms, and the factoring company collects the fee.
Now that you know the basic steps of invoice factoring, you might be getting a better idea of whether or not this kind of operation would be right for your company. If you’re unsure about invoice factoring’s value, read about its major pros and cons.
Advantages and disadvantages of invoice factoring
To determine if a financial agreement suits you, learn its pros and cons. For that reason, we have broken down the primary pros and cons, or advantages and disadvantages, of invoice factoring.
The pros
There are three primary advantages to invoice factoring:. Those include:
- You get quick and easy access to working capital
- Offer longer, more flexible net terms to clients without stopping cash flow.
- You receive higher credit limits based on the creditworthiness of your clients, not just your business income and FICO score
The cons
While there are advantages, be aware of the disadvantages too. Those include:
- Not available to B2C companies or companies that do not have notable or larger clients
- More expensive than traditional bank financing
- Your clients’ overdue invoices may result in potential liability.
What about terms and rates?
Another thing that you will definitely want to learn about as you continue to figure out whether or not invoice factoring is right for you is information regarding the terms and rates of a related agreement. The fee structures for factoring companies vary and are either variable or flaky. Typically, the more invoices you factor in, the lower your rate is going to be.
When it comes to financing agreements that come with a variable fee structure, factors are going to discount a small percentage of the invoice for as long as the invoice is outstanding. This means that the longer your invoice goes unpaid, the more fees you are going to accrue over time. While this type of fee structure is more difficult to calculate, it can be more cost-effective. That is especially true if your clients end up fulfilling their invoices in a short amount of time.
Of course, the flip side of this is that if they take a long time, you could end up paying more.
When it comes to a flat rate structure, the rate will remain the same no matter how overdue the invoice becomes. However, flat rates are typically higher than variable rates. This is a preferred rate for you and your business if you have a belief that the clients and customers who owe you and have yet to fulfill their invoices may take a long time to do so.
The following factors determine terms and rates:
- Business industry
- Volume of invoices
- Net terms of the invoice
- Types of service
- Quality of clients
Who works with invoice factoring?
You may find it interesting to learn about the types of companies that work with invoice factoring companies. This could certainly help you get a better idea if the agreement is a good fit for you and your business! Businesses in the following industries tend to be heavy users of invoice factoring:
- Transportation
- Manufacturing
- Construction
- Staffing services
- Freelancer
- Distribution
- Commercial services
- Oil and Gas servicing
- Consulting
- IT Services
- Consulting
Conclusion
Now that you have a pretty good idea of what it means to work with an invoice factoring company, chances are good that you now have a pretty good idea about whether or not it could be a great fit for your company. Overall, invoice factoring is a great way to make sure that you are not dependent on your clients paying their invoices in order to make sure that your business is operating smoothly and growing consistently. That way, you reach your business goals in no time!
