Invoice factoring is an innovative financing solution to companies’ cash flow problems. It involves getting an immediate advance payment of your outstanding invoices in exchange for a fee. The balance owing is transferred to your business account when the invoice is paid to the factoring company in full. The benefits of using a factoring company to help you solve your cash flow issues are many, including simple qualification requirements. To ensure fast approval processing, follow these tips to help you with the application process.
You Must Have Invoices to Factor
This may seem obvious, but if you don’t have outstanding invoices or your invoices get paid on time every time, you don’t need . For instance, if you’re a retail company and your customers pay at the time they receive your goods, you don’t have any outstanding invoices to factor. You may still have cash flow issues because you have to buy inventory upfront, but factoring is not going to help you with that issue.
Factoring is meant for companies that have outstanding invoices for a month or more because of the terms they offer their customers. Staffing, trucking, manufacturing, healthcare, and other similar industries are the most common types of companies that use factoring services. That’s not to say your industry won’t benefit from this process. If you have outstanding invoices and customers who are slow to pay, factoring might be a solution for you.
You Have to Apply
Factoring companies require their partners to fill out applications to capture important information and to determine their need for factoring. The application typically asks for your company’s details like how it is structured, who owns it, your certificate of incorporation (or similar), your federal ID number, your tax returns, and other state and federal documentation. There are specific requirements that the factoring company has to abide by for tax purposes, so it has to make sure all its paperwork is in order.
An application may also ask for your invoice volume to determine the extent of your partnership with the invoicing factoring company. For example, trucking companies might have a long-term partnership because they need to factor all their invoices for an indeterminate amount of time. But a construction company that just needs to find some cash to buy materials for a new project may only need a factoring company for a few months.
You Must Have a Business Bank Account
Factoring isn’t a good option for companies that deal all in cash and don’t have a business bank account. You can’t get your factored funds in cash or sent to a personal bank account. Typically, your funds are transferred to your business bank account within 24 hours of invoice submission, so you have to have an account for that transfer to happen. Factoring companies usually wire the funds to an account or send it by ACH, but either way, a business bank account is required.
You Must Have a Federal Tax ID Number
As briefly mentioned above, your application for factoring will ask for your federal tax ID number (TIN). You can’t apply without it because the IRS has to know about the transactions. The factoring company will take care of this for you, but they need your TIN to do it. Plus, you have to prove that your company is legitimate, which is another way for the factoring company to protect itself when doing business.
You May Have to Provide a List of Your Customers
Factoring companies are essentially giving you an advance payment on your invoices because they believe they’ll be able to collect the full amount from your customers. As such, they will want proof that your customers are creditworthy and are able to pay their bills, even if they’re slow in doing it. Factoring companies are experienced at invoice receivable management but are not collection agencies. Their expectation is to receive full invoice payment within the recourse period which is generally 30 to 90 days. Typically, factoring companies will refuse to factor any invoices from your customers that take longer to pay.
If you do have some customers that aren’t very creditworthy, you can choose options that will still allow you to get approved for factoring. You can eliminate the weak credit customers from your list of customer invoices to be factored, accept a higher fee for factoring invoices, or agree to accept a significantly lower advance rate for your outstanding invoices. These options lessens the risk for the factoring company and therefore allows them to consider funding your lower creditworthy customers.
Applying for factoring is much easier and faster than applying for a business loan. You should be able to get approved within a few days, which can really help you out if you’re experiencing immediate cash flow problems. Just be sure you have your paperwork in order so you can provide the documentation the company asks for and you’ll be factoring your invoices in no time.