How Can Invoice Factoring Help My Business
Running a business requires a lot of responsibilities if you want to keep it constantly growing and remaining successful at all times.
Having financial stability is a major aspect of a successful business, and it allows the owners to focus on developing strategies to boost that success even higher.
Many business owners can have difficulties with keeping a steady flow of income due to clients taking months to pay for the services they received from your company. This type of payment delay can damage the growth of your business and cause a lot of problems for your personal and professional lives.
Luckily, there is a way to bring consistent cash into your company without needing to wait for a long time for your clients to pay for the invoices you issued to them. Companies such as factorfinders.com have been extremely helpful by giving businesses a great solution that keeps them going through choosing to factor their invoices.
Keep reading to get an answer to all your questions about factor invoice and to learn how to provide your business with the help it needs to succeed.
What does invoice factoring mean and how does it work?
Invoice factoring is a financial process that involves selling your clients’ unpaid invoices to a factoring company that will give you money immediately. Once you sell the unpaid invoices you will not be responsible for collecting the amount from the client, as the factoring company can do that for you.
Factoring your unpaid invoices allows you to stop worrying about your financial status and focus on the important aspects of your growing business instead of chasing your clients for their overdue payments.
As for how it works, it is a simple and easy process with multiple steps:
Step 1: Find a factoring company and send in your application
There are many factoring companies that offer great services and it is recommended that you find one that pays you within 24 hours, has excellent customer service, and allows a flexible contract.
Once you have found a factoring company that you can trust, submit your application along with the required documents and the invoices you want to factor.
Step 2: Receive an approval from the factoring company
Generally, you will hear back within 3 to 5 business days from the factoring company after submitting your application and the documents. This is an evaluation period that is done by every invoice factoring to confirm that the clients whose invoices you want to factor have received all the services you issued a bill for, as well as doing a credit check on them to ensure that they are able to pay.
Step 3: Get paid for the invoices you factored
After you receive a notification for getting your invoices approved, you will get the first part of the payment installment within 24 hours. This first payment will be a percentage that is determined by the factoring company, which is generally 70 to 85 percent of the total amount of the invoices.
Step 4: The factoring company will begin collecting the money from the client
The factoring company will refer to your clients as debtors and they will receive a letter from them to notify them that they are now responsible for collecting the money that they owe for the services.
The debtors will also learn in the letter that they are required to pay them within 90 to 120 days.
Step 5: Receive the final payment
If the invoice factoring company successfully collected the money from the debtor, they will send you the second payment installment after they take out the factoring fee from it.
In some cases, the debtor could fail to pay them due to financial issues such as filing for bankruptcy or wanting to dispute the charges for your services. If that happens, you will be required to compensate them by following their terms. Depending on the factoring company and the type of factoring you agreed on, the compensation could be by giving them another invoice to factor or returning the money back.
Is invoice factoring guaranteed to help my business?
Invoice factoring is a super easy and quick way to effectively benefit your business and have a steady flow of cash coming in without any delays that can cause problems for you.
It is guaranteed to earn you money the fastest way possible but the amount will vary depending on what type of factoring you choose. Many factoring companies will offer their customers two options to choose when factoring invoices and they are recourse and non-recourse.
Recourse factoring is a common choice for business owners, as they will receive more money for selling invoices than the non-recourse option. Recourse factoring means that you will be responsible if the client doesn’t pay the factoring company for the invoice that you sold to them.
This means that once you sell the invoice to the factoring company you will immediately receive the money for it within 24 hours and you will get to keep it as long as they succeed at collecting that amount from the debtor. If they fail to do so, you will be required to compensate them based on the factoring company’s terms, which could be by returning the money back to them, getting it deducted from another invoice you sold, or giving them a new invoice to cover the costs.
Non-recourse factoring is the second option and it completely guarantees that you will keep the money you receive for the invoices you sold. However, the non-recourse comes with a lot of restricted rules that you have to follow in order to get approved for this option and you will receive a percentage of the total invoice value that is less than what the recourse offers.
Will invoice factoring cost you money?
Invoice factoring will not cost you any upfront money except when you have to pay for an application fee. Most invoice factoring companies do not ask their new customers to pay them before they start the factoring process.
Each factoring company has its own fees that are required to pay to keep the customer’s account running but they are paid for through deducting it from the invoices that you sell.
Aside from the factoring service fee, there are additional ones that are used to cover other services such as the application review process. Here are some additional fees that you might be charged for:
- Application fee: This is the most common fee that many factoring companies will charge. It is a fee that covers the time they take to review your application, the documents, and develop a contract between you and the company.
- Account setup/diligence fee: Account setup/diligence fee could be required upfront before the factoring company begins running a credit check on the clients who will become debtors. This fee is also used to open an account with the company.
- Maintenance fee: Your invoice factoring account needs consistent maintenance to ensure that it is working smoothly and without problems. This also requires a fee to cover for that service and the work they are putting in to keep your account active.
- Monthly minimum fees: Monthly minimum fees are only required if you haven’t met your minimum for the invoices within that month. Some factoring companies need to add this fee to protect themselves from losing money.
- Wire fee: All invoice factoring companies use an automated clearing house to pay you for what you sell to them, which doesn’t cost you money unless you decide to have wire transfer that money instead. This fee is going to vary from company to company.
- Cancellation fee: This fee could also be referred to as an early termination fee. It is required if you want to terminate your contract with the factoring company before it ends. These contracts are typically 6 months to a year and some factoring companies give their customers a lot of flexibility by offering them a month-to-month contract instead.
Can invoice factoring be flexible?
Invoice factoring is extremely flexible and many companies will give you the freedom to choose between the following:
Spot factoring: Spot factoring is an option that allows you to pick which invoices you want to sell. This choice gives you a lot of control by keeping some clients’ invoices to yourself. While spot factoring is a great opportunity, it does come with a small price and it is selling your invoices for a lower price.
High volume factoring: High volume factoring is the opposite of spot factoring, as well as the most traditional option of invoice factoring. Factoring companies allow high volume factoring as long as the customer signs a contract with them to give the full permission to factor all of the invoices. High volume factoring will increase your business’s profits each month and keep you financially stable.
Whether you choose spot factoring or high volume factoring, recourse or non-recourse you are guaranteed to receive instant cash that will help your business grow tremendously and give you a peace of mind.