Why You Shouldn’t Always Choose the Cheapest Factoring Company

No one likes to pay too much for a product or service, which is why we all shop and compare when we buy just about anything. But, when it comes to certain types of business services, you typically get what you pay for, which can end up costing you much more in many ways. You don’t want the cheapest or least experienced accountant working on your taxes because it could cause you lots of problems down the road.

There’s nothing more important to a business than its cash flow, so when a cash crunch occurs, you want a factoring company that’s experienced, efficient, and ethical.

While that may cost a bit more, it would be important to compare it to the potential costs of working with a “cheaper” factoring company.

Ways You Pay More for a “Cheaper” Factoring Company

During this time of business expansion, factoring companies have proliferated and with all the new entrants in the industry, it has become highly competitive. Newer and less experienced factoring companies have to compete by offering lower factoring fees. But, because they can’t survive on lower fees, they have to layer on additional, often hidden, fees. So, while you may pay a half or full point less in factoring fees, you are likely to be hit with additional fees such as:

  • Application and processing fees
  • Origination fees
  • ACH transfer fees
  • Credit check (on your customers) fees

These fees are typically buried in the contract so they are not so obvious, but they can add up. The fine print may also contain some backdoor fees that can be very costly, including minimum volume fees, termination fees, and float cost.

Minimum Volume Fee

Some factoring companies may charge a low fee but then require you to factor a minimum volume of invoices. If you don’t meet the minimum volume requirement, you can be charged additional fees of a percentage surcharge.

Termination Fee

Some factoring companies require a time commitment of three to 12 months. So, even if you don’t need to continue to factor invoices, the factoring company won’t let you out of the contract until the time commitment has been met. You could end up paying $1,000 to get out of the contract.

Float Cost

When a customer pays a factored invoice, it can take a period of time for the money to clear in the factoring company’s account. During this period of time, the factoring company continues to accrue interest on the outstanding amount. To cover their interest costs, factoring companies typically add three to five days of float to the invoice term. The problem is, an extra day or three added to the invoice term can increase your factoring costs substantially.

Some factoring companies are bank-owned or affiliated, which means there is minimal float. Because they have direct fund access, funds are transferred more quickly on both ends of the transaction, saving all parties time and money.

The Cost of Poor Service

Far worse than additional money costs is the potential cost of losing a valued customer. When you factor an invoice, the factoring company essentially becomes your representative when collecting payment. Cheaper factoring companies may not be able to pay for well-trained, quality staff to interact with your customers. Customers could perceive a poor interaction with a factoring company as a sign of trouble. It could certainly hurt your business’s reputation. The best factoring companies take ownership of your success and strive to conduct themselves professionally and conscientiously.

“Cheap” is Never Cheap

Quality factoring companies may charge a slightly higher factoring fee, but they are completely transparent with their customers. Generally, they don’t layer on fees and, if there are any additional fees, they are disclosed upfront.

Factoring companies that are bank-owned or affiliated have direct access to funds so they don’t incur any interest costs that must be passed on to their customers. Because they transact within their bank, you have quicker access to cash when you need it and you are credited more quickly when your customer pays the invoice.

And, when it comes to customer service, you almost always get what you pay for. Factoring companies that are more established are usually more experienced with customer interactions, always striving to make their business clients look good.

When your cash flow, bottom line, and customer relationships are at stake, it just doesn’t pay to go cheap.

Why Accounts Receivable Factoring Isn’t Really a Loan

For businesses looking for a quick cash infusion, accounts receivable factoring may be an ideal solution. However, there is a popular misconception that may be preventing many businesses from considering it as a financing option, which is when you are factoring accounts receivable, you are taking out a loan.

The bottom line is that it’s not a loan. It’s actually a sale transaction.

Here’s How It Works:

A business sells its outstanding receivables, or invoices, to a factoring company in exchange for cash. No borrowing. No ongoing interest charges. Just a straightforward transaction that puts your money to work for you more quickly.

With that out of the way, it might be helpful to understand the differences between taking out a business loan and factoring accounts receivable and their impact on your business.

Accessing Capital through a Bank Loan

When you borrow from a bank, you are essentially using other people’s money to finance your business, for which you pay interest. For that reason, the bank has you go through an extensive process to determine whether your business has the capacity to repay the loan on time. If your business has a solid credit history, you may qualify for a loan with favorable terms and a low rate of interest. The one advantage of financing through a bank is it can be the least expensive form of borrowing.

However, if your business credit is subpar, you may not qualify for a loan or, at best, qualify for a loan with less favorable terms and a higher rate of interest. That can be costly over a 24- or 36-month term.

Also, when you take out a loan, your business has to carry it on the books as debt and the ongoing interest charges can eat into your cash flow. That could make it difficult to go back to the bank and borrow more money if you need it.

Accessing Capital through Accounts Receivable Factoring

When factoring accounts receivable, you are not using other people’s money. In essence, you are using your own money already owed to you by your customers. Here’s out it works:

  • The business generates an invoice for a customer
  • A copy of the invoice is sent to the factoring company which reviews it
  • If the invoiced customer meets its criteria as a financially sound company that reliably pays its bills, the factoring company transfers up to 90% of the invoice value to the business.
  • The factoring company follows up with the customer for payment and, when it is received in full, the remaining 10% of the invoice value is transferred to the business less a one-time factoring fee.

All of this can happen within a span of two to three days for a new factoring account or in as little as a few hours for an established factoring account.

Also, there’s no long application or credit approval process for the business because the factoring company relies on the financial strength of the business’s customers.

While factoring accounts receivable can be a more expensive form of financing – factoring fees can range between 1% and 3% per month, you can control your costs by submitting invoices only when the need for cash arises. Because you don’t have to wait 30 to 90 days to receive your money, you can put it to work immediately in your business, which can at least partially offset the cost of factoring.

How to Know Which is Best for Your Business

All growing businesses are susceptible to temporary cash crunches, but not all businesses can qualify for favorable bank loans. As your business grows and generates more sustainable cash flow and profits, it will be in a better position to take advantage of lower-cost bank financing. At that point, you’ll probably have the need for additional working capital to expand and that’s when bank financing is your best option.

Until then, businesses need to be nimble and flexible in being able to meet their cash needs, which is why factoring accounts receivable is typically the best option. However, as with any business decision, it is important to do your due diligence to ensure you are partnering with the right factoring company – one that doesn’t overcharge you with hidden fees, and one that will represent you well with your customers. The right factoring company can be an invaluable partner in your success.

You may not have considered accounts receivable factoring, perhaps because of some of the misconceptions surrounding it. But, since you’re here reading this, we invite you to learn more and see how it can address your short-term cash needs. You can get more information and a quote by going to our complete invoice factoring guide, or simply requesting a free quote.

5 Reasons Factoring Receivables Makes Sense

There’s nothing more worth celebrating for a business than getting a major new customer or a big new order. It’s an exciting time for everyone in the business as it ramps up production, adds staff, and buys inventory in anticipation of new revenue. However, if it’s a typical business that operates from invoice to invoice, that excitement can turn to dread as it waits for the new customer to pay its invoice. It’s like running on a treadmill trying to get their cash flow to catch up with their invoices, making it difficult to achieve sustainable growth.

However, when businesses understand the power of factoring receivables, there is nothing to dread.

Like Dorothy’s ruby red slippers, businesses have always had the power to get where they need – with the receivables themselves. That’s because, in the world of factoring, receivables are as good as cash on hand. The moment an invoice is generated, it can be exchanged almost immediately with a factoring company for up to 90% of its value in cash. They receive the balance, less factoring fees of 1% to 5%, when the customer pays the invoice. With an established factoring account, the process of factoring receivables can be repeated as often as needed.

When Factoring Receivables Makes Sense

As with any form of financing, factoring receivables may not make sense for every business. However, if you are a B2B business with financially stable customers, it may make sense for the following reasons:

1) Faster and easier than traditional bank lending.

It’s called a cash flow crunch because it’s happening right now. Traditional banking may be preferable for well-established businesses with a solid credit history and strong cash flow. However, even if you could qualify for a traditional loan or line of credit, the application and approval process can take weeks, sometimes months, with no guarantee of receiving favorable terms.

A factoring receivables account can be set up with funds approved and delivered within a day or two. With an established account, you can submit an invoice and have cash on hand within hours. While traditional financing may be less expensive in the long run, you can control your factoring costs by submitting invoices only when needed, costing you less in the short-run.

2) Cash on hand today can be worth more now than when it’s received in 30 to 90 days.

The only thing worse than not being able to pay the bills today is the cost of lost opportunities. Businesses need to cover their operating costs while ramping up for a new customer. But they also need to have capital available to be able to jump on new opportunities. Businesses stuck in a perpetual cash crunch cycle have difficulty doing either. Having the cash today to take on a new order or a new customer can be worth far more than the 1% to 5% in fees.

3) You can still treat your customers well.

Good customers expect some level of preferential treatment that includes favorable payment terms. When you work with a factoring company, it acts on your behalf to collect the payment according to the original terms of the invoice.

4) Your credit is not negatively impacted because it’s not a loan.

Receivables factoring does not involve loan financing. It is a sale transaction involving the exchange of an invoice with cash. The only credit check involved is with the business’s customers because the factoring company needs the assurance the invoice will be paid.

5) Factoring receivables with a bank.

While factoring receivables is a straightforward process, the cost and quality of services can vary widely among factoring companies. In many cases, the factoring company operates as a middleman between the funding source and the business, which can add costs and slow down the process. Factoring companies, such as altLINE, that are bank-owned, operate in a highly regulated industry and have direct access to funds, which lowers the cost and accelerates the process.

For growing businesses, cash is their lifeline and having to wait to receive payment for work already performed can make it difficult to get to the next level. That’s when having a ready source of capital makes sense and, for many businesses, factoring receivables can be the easiest, fastest and most flexible way to access capital. We invite you to contact us to learn how our 80 years of experience can make your cash flow concerns go away.

Does Invoice Factoring Affect My Credit Score?

Successful business owners know how important their business credit score is.

Building and maintaining a solid credit score is crucial for businesses as it can impact their ability to access capital as well as their credibility with vendors and customers. However, as less established businesses work to build their credit score, their access to traditional bank financing may be limited if they don’t have a long operating or payment history. For these businesses, invoice factoring is a viable option for obtaining access to capital but some businesses may be reluctant to utilize it for fear of affecting their credit score.

But, when business owners better understand what goes into calculating their credit score and how factoring works, they discover that, not only does invoice factoring not affect their credit score, it can indirectly help it in the long run.

How Your Business Credit is Scored

There are three business credit bureaus – Experian, Equifax, and Dun & Bradstreet – that collect information such as your business’s financials, banking and collection history, and history of liens and judgments. Each credit bureau uses its own factors and formulas to calculate your credit score, which they refer to as a risk score. The most heavily weighted factor in risk scoring is your business’s payment history. The quickest way to build your credit score is by never missing a payment.

Unlike a personal credit report which requires your authorization to release, anyone can access your business credit report. A customer, vendor or lender can view your financial relationships along with your borrowing and payment activities.

Because invoice factoring doesn’t involve lending – it’s a sale transaction that exchanges cash for your business’s outstanding invoices – it’s not reported to the credit bureaus. It is not considered to be debt, so it doesn’t impact your debt-to-income ratio. While some factoring companies might check your credit report for background information, it is not treated as a lender inquiry, so it won’t have a significant impact on your credit score.

How Invoice Factoring Affects Your Credit Score

The bottom line is invoice factoring does not impact your business credit score. In fact, there are several ways it can help you to build your score.

1) Helps to ensure you maintain an on-time payment history

If you are cash flow conscious, you may have a tendency to wait until your customers pay you before paying your bills. However, if you run into a cash crunch, you risk missing a payment. When you have a factoring relationship, you can simply sell your invoice as soon as it’s issued and receive the cash within a day or two. You maintain an on-time payment record while keeping your working capital balance flush.

2) Enhances your business’s credibility

Vendors, contractors, and customers are always concerned about the credibility and reputation of the businesses they work with. If your business is known for periodically missing a payment, your relationships can sour. Vendors could decide to stop extending credit or stop doing business with you altogether. Customers could become concerned about your credibility and contractors could decide there’s too much risk in working with your business. When you keep your cash flowing through factoring, you can pay your vendors and contractors on time, or early, which enhances your business’s credibility and strengthens your relationships.

3) Get capital without hurting your credit score

When you obtain bank financing, your business credit score is impacted negatively. Carrying any amount of debt can hurt your score, especially if your debt-to-income ratio increases too much. If you apply to multiple banks, the credit inquiries can also hurt your score. With factoring, you aren’t incurring debt and the transaction doesn’t require any credit check because the factor relies on the creditworthiness of your customers.

The bottom line is, by utilizing factoring, you keep your credit report clear of unnecessary debt, which can position you more strongly when you are ready to seek traditional bank financing in the future.

What if My Business Credit Score is Already Bad?

While you always have the chance to improve your credit score, it could take time, which is why invoice factoring is an ideal solution for your financing needs. That’s because your credit score is not even a consideration when applying for a factoring account. Factoring companies are more concerned with the creditworthiness and financial strength of the customers who are paying your invoices. If you are B2B business with customers who have a track record of on-time payments, you can qualify for invoice factoring.

We invite you to learn how altLINE, with its 80 years of experience serving customers, can partner with you to eliminate your cash flow concerns and grow your business.

Does Factoring Work for Startups?

Anyone who has started a business understands the immense challenges of getting it to the next level where it can grow and prosper.

The central challenge for startup businesses is having sufficient working capital on hand to manage operations and pursue growth opportunities. In fact, the working capital requirements of startups can actually become a growth inhibitor, except when factoring is used.

What Financing Options do Startup Businesses Have?

Startup businesses typically have no credit standing which makes it difficult if not impossible to obtain traditional financing through a bank. The process of qualifying for bank financing can be extremely cumbersome and lengthy with no guarantee of a successful outcome.

Some startups might seek funding through venture capitalist, which is fine if you don’t mind parting with equity and turning partial control of your business over to the venture capitalist. VC funding is not very practical for startup businesses that only require small injections of capital.

If you have already hit up family and friends for help, the only other option is to bootstrap your business and resign yourself to growing it slow. That could be the death-knell for any business trying to survive in a competitive market.

None of these are good options for startup businesses with growth ambitions that are unable or unwilling to take on debt or give up control of their business.

Invoice Factoring: Turning Business Assets into Cash

Instead of looking outward for unappealing financing alternatives, startup businesses can look inward, using their unpaid invoices as a readily available source of working capital. This is accomplished through invoice factoring – a well-established practice of exchanging outstanding invoices for cash that is repaid when customers pay their invoices. It works like this:

A business establishes a factoring account with an invoice factor. When the business needs an injection of cash, it sells an invoice, or multiple invoices, to the factoring company. The factoring company then transfers between 80% and 90% of the invoice’s face value to the business’s bank account, holding the balance in reserve. When the business’s customer pays the invoice in full, the factoring company transfers the remaining balance less a factoring fee of 2% to 4%.

From the time the factoring account is established to the time funds are transferred takes one to three days. With an established factoring account, the exchange of invoices and cash can take place in as little as one day.

Why Invoice Factoring Makes Sense for Startups

While startup businesses may have several options for financing their working capital needs, invoice factoring may be the best option for several reasons.

1) Fast turnaround

As described above – there is no other source of financing with faster cash turnaround.

2) No credit requirements

In making their decision to approve a factoring account, factoring companies rely on the creditworthiness and financial strength of the business’s customers. While factoring companies may avoid businesses with outstanding liens or judgments, a business does not need to have established credit or a long operating history – just customers with an established payment history.

3) No debt

With invoice factoring, you are not borrowing money; you are in effect selling an asset. Therefore, the capital you receive is not a loan. Many businesses prefer invoice factoring over a bank line of credit because they don’t want to carry debt on their balance sheet.

4) Factoring is flexible

Startup companies must be nimble with the ability to quickly respond to opportunities or problems. Rather than being bogged down with a bank loan or VC commitments, businesses can turn to factoring for a quick cash infusion when the need arises. Businesses can factor as many invoices as needed to meet their needs.

5) Cheaper capital

While invoice factoring is not an inexpensive form of financing, it can be less expensive than carrying debt or giving up equity. With invoice factoring, businesses can better control their financing costs because they can control when and how much they factor. Also, considering that the factoring company takes on the responsibility of collecting payments, the business can save on staffing costs and direct resources to growing the business.

Startup businesses need working capital, but they can’t afford to take their focus off the vital issues while trying to obtain financing. Considering all the advantages of invoice factoring, it seems as if it was tailor-made for startup businesses – low cost, fast, flexible, no credit requirements. With more than 80 years working in the business community, altLINE clearly understands the challenges facing startup businesses. Contact us today to learn how altLINE can partner with your business to ensure its success.

Invoice Factoring or Discounting: What’s the Difference?

The rising popularity of invoice factoring as a no-fuss, no-muss funding source for businesses has spawned an entire industry of factoring companies offering a range of options to address the varying types, needs, and preferences of businesses. Two of the more popular options – invoice factoring and invoice discounting – are often mistaken for each other. While they are both designed to achieve the same objective – making capital available for businesses quickly and easily – they differ in the way they achieve it. The differences are significant enough to make either alternative more or less suitable for a particular business based on its size, financial strength, and capacity to perform collections.

We explain the differences between invoice factoring and invoice discounting and why one might be preferred over the other.

What is Invoice Factoring?

With invoice factoring, a business sells its unpaid invoices to a factoring company in exchange for an advance on those invoices. The amount of advance can range from 70% to 90% of the face value of the invoice. The factoring company retains the balance in a temporary reserve account until the invoices are paid when it then remits it to the business minus a fee.

For example, Stan’s Fertilizer Company ships 10 tons of fertilizer to ACME Farms and then prepares an invoice for $5,000 payable in 30 days. Stan’s then sells the invoice to a factoring company which then advances $4,000 to Stan’s. The factoring company then sends its own invoice to ACME for payment.

After 25 days, ACME pays the $5,000 to the factoring company. The factoring company then transfers $800 to Stan’s bank account, withholding $200 to cover its fees. As a result of this factoring transaction, Stan’s received immediate access to funds owed by ACME to use in its business and it ultimately collected 96% of the original invoice.

What is Invoice Discounting?

As with invoice factoring, invoice discounting is a straightforward transaction in which a factoring company provides a cash advance based on the face value of an invoice. The major difference is that the business receiving the cash advance retains the responsibility for collecting payment. It works this way:

Instead of sending a copy of the invoice to the factoring company, Stan’s sends the invoice directly to ACME Farms. When the invoice is prepared on Stan’s accounting program, it is shared with the factoring company, which then transfers the cash advance of 70% to 90% of the invoice face value. A trust account is established with the factoring company for receiving the payment from ACME Farms. When the payment is received in full, the factoring company transfers the remainder of the invoice value less the factoring fee.

Main Differences Between Factoring and Discounting

The big difference is who maintains responsibility for collecting payment. With invoice factoring, the factor is responsible for collection. With invoice discounting, the business is responsible for collection, so the customer is unaware a factoring company is involved.

The other significant difference is the fees for invoice discounting are typically less than the fees for invoice discounting because the factoring company is not responsible for collecting the payment. Fees for invoice factoring tend to range from 1% to 5% while fees for invoice discounting can range from 1.5% to 2.5%.

Another significant difference is the level of commitment required by the factoring company. With invoice factoring, a business can select which invoices it wants to sell to the factoring company. With invoice discounting, the factoring company typically requires that the business submit its entire invoice book.

Factoring or Discounting – Which Should You Choose?

  • You might prefer factoring if you have a smaller business with limited resources for collecting invoice payments. Some businesses use factors specifically for that reason.
  • Factoring might make sense if you don’t care whether your customers know you are using a factor. Some businesses use it as a selling point – i.e., more resources can be used to service the customer.
  • Factoring would be the better option if you want more flexibility in choosing which invoices to factor.
  • Discounting may be more preferable for companies that have the resources to perform their own collections. The fees are smaller so they can save on financing costs.
  • Discounting is preferred by companies that would rather not let their customers know they are factoring their invoices.

We invite you to take advantage of altLINE’s 80 years of experience working with small- and medium-sized businesses to explore funding options for your business. Request a quote today.

What You Need to Know About the Invoice Factoring Approval Process

An increasing number of businesses are discovering the advantages of invoice factoring, the biggest of which is quick access to capital. Anyone who has applied for a business loan through a bank understands how cumbersome and lengthy the process can be, often taking weeks for approval. Compare that to three or four business days for approval and funding through invoice factoring and it’s not surprising that many businesses are now using it as their default source of capital.

The invoice factoring approval process is much more streamlined and far less cumbersome, offering businesses more flexibility and security in meeting their cash needs.

However, the approval process can differ among the various factoring companies, with varying costs, requirements and timelines. It would be important to know how the process should work and what to expect when you contact a factoring company so you can make the proper comparisons.

While the process is typically quicker and easier than traditional bank financing, applying for invoice factoring services still requires thoroughness and attention to detail. The more prepared you are, the more smoothly the process will go, which means quicker access to the cash your business needs.

Here’s how the approval process works:

Once you’ve received your quote from a factoring company, there are four basic steps until you get your cash.

1) Request a Quote

When you contact a factoring company for a quote, you may speak with an invoice factoring services specialist to discuss the options available to you based some initial questions about your business’ financial history and needs. You should be prepared to provide some information about your business, such as:

  • Number of current customers
  • Your average monthly revenue
  • Number and amount in outstanding invoices
  • Current or past liens or judgments against your business

If you’re not asked for this information in your initial call, you will certainly be asked on the application.

Before they can provide you with a rate quote, you will need to complete an application and provide supporting documents.

2) Submit Application and Supporting Documents

This is where the invoice factoring approval process can vary among companies. Some companies charge an application or due diligence fee while others charge nothing. In most cases, the application process takes place virtually – online, through phone calls, faxes, and email. It is important to be thorough in your application to avoid back and forth phone calls asking for clarification. In addition to the application, you need to submit supporting documents, including articles of organization or incorporation, bank statements, copies of current invoices, and a payables aging report.

Some factoring companies may provide an initial rate quote upon receiving the applications but it won’t be confirmed until everything has gone through the underwriting process.

3) Factor Underwriting

The factoring company reviews your application and documentation to determine your rate. There is typically no credit check because the factoring company is mostly concerned with the creditworthiness of your customers. So, much of their due diligence is spent looking into their payment histories. In most cases, underwriting is completed within a day or two and the factoring company will notify you of your approval.

4) Establish the Factoring Account and Get Funding

When you are approved, the factoring company sets up a factoring account to handle the transactions. Once established, your factoring account can be used for all future invoice factoring.

When you sell your invoices to the factor, it submits a notice of assignment and then provides a cash advance of up to 90% of invoice face value. The remaining funds are held in a reserve account until the factor receives payment from your customer at which point it deducts its factor fee and remits the balance to your business.

Funds are typically available to your business within one to two days of approval.

It’s All Downhill From There

That’s it. A simple and straightforward process taking less than four days to complete. Going forward it gets even easier to access capital for your business. With your factoring account already established, all you need do is submit a new invoice and funds can be available as quickly as one to two days.

At altLINE, we pride ourselves on our highly streamlined and professional invoice factoring process. There are no hidden fees and, as a direct funding source, our clients save on their borrowing costs. We invite you to learn more about the advantages of partnering with altLINE for your funding needs.

Invoice Factoring Advantages and Disadvantages

Invoice factoring can help business owners fill the gap between when an invoice is created and when the customer actually pays. It’s a way of obtaining cash to invest back into your company sooner rather than later, though you’ll want to be wary of extraneous fees and sneaky policies before sealing the deal.

What are the Advantages of Factoring?

Whether you’re a small business owner or manage a large operation, factoring can be an asset for your B2B strategy. It offers benefits that other traditional lending options can’t provide, and is a more accessible solution for many businesses. To help break it down, here are some advantages of invoice factoring:

1) Quick cash for your business

Probably the most obvious reason why people turn to invoice factoring, it provides fast cash to keep processes running smoothly.

There are legitimate reasons why a business owner would need to get access to the fast cash, such as:

  • Paying employees
  • Settling monthly bills
  • Bringing in fresh inventory
  • Expanding to a new location

In general, keeping cash on hand means you can say “yes” to a new opportunity, instead of passing it up because you’re waiting for funds to come through.

2) Easier approval than a traditional loan

Getting a loan can be out-of-reach for businesses with limited collateral and a short financial history. However, invoice factoring companies pay most attention to the credit scores of your customers. That means a faulty or nonexistent track record won’t matter as much when you apply.

3) More flexibility for your clients

Increased cash flow for your company means you’re able to allow customers a little more leeway. Instead of requiring immediate payment, you can give them a month or more to complete the invoice, without worrying about the strain it’ll place on your own business.

4) Limited risk for you

Unlike a traditional loan, which requires collateral, invoice factoring is unsecured. So you won’t need to worry about valuable assets being seized if the customer fails to pay.

5) Helps manage overdrafts

Invoice factoring can help you meet the required minimum balances on your bank account and pay settle your businesses own dues so that you don’t have to risk defaulting on financial commitments

6) Highly accessible

After you initially set up an account with an invoice factoring company, you should be able to receive cash within hours of submitting an invoice. These days, you can usually manage the process entirely online.

What are the Disadvantages of Factoring?

That said, factoring isn’t always the best option for everyone. Be sure to weigh the potential drawbacks before determining what’s best for your business. Here are some of the potential disadvantages of invoice factoring:

1) There’s a stigma

While invoice factoring is, at its core, a business practice like any other, it has a bit of a shady past. Lenders have been known to take advantage of clients with confusing language and dodgy practices, though industry standards have since evolved for more transparent transactions.

2) Reduced profit margins

The factor company basically takes a cut out of each invoice. Even though it can be as low as 1-3%, you’re still losing a bit of income in the long run which may affect your company’s monthly budget.

3) Customers’ credit score could thwart financing

Though the pressure to have good credit is off your shoulders, a factoring company will need to verify your customers’ creditworthiness before taking the invoice. If the rating isn’t up to snuff, your invoice factoring request might be denied.

4) Collection isn’t guaranteed

Just because the factoring company buys the invoice doesn’t mean the customer is guaranteed to pay. In some cases, you might be required to settle the bill if the invoice isn’t cleared.

5) It’s a quick fix for only one problem

If customers are delaying payments and it’s messing with your business plan, it may indicate a more complex problem that needs a different strategy to stabilize things for the long-term.

6) Hidden costs and fees from shady providers

Not all factoring companies are the same, and some will try to take advantage of you. Application, processing, credit check, and late payment fees can add up – quickly. Even if you’re OK with the quoted factoring rate, be wary of additional costs and be sure to conduct thorough research before signing on. Make sure to read the fine print, and ask questions up front.

Like any business practice, invoice factoring comes with pros and cons. Carefully consider the why behind your choice. Will it help your company grow and expand? Are you planning on investing the money back into your merchandise or employees?

If your answer is yes, the advantages of factoring likely outweigh the disadvantages. If you’re interested in learning how it may work for you, request your free factoring quote from altLINE with basic information about your business. Find out why our customers trust us over the competition!

For more information, check out these helpful links to other valuable resources:

Invoice Factoring Myths and Misconceptions

All growing businesses reach a critical juncture when they need access to capital to get to the next level. Whether it’s for hiring more staff, expanding operations, buying inventory, or taking on new customers, small businesses often come up short due to the lag between growing sales and the cash flow it creates. Invoice factoring is becoming a go-to funding source for businesses that don’t want to rely on traditional financing through banks.

Although invoice factoring has been a legitimate funding solution for several centuries, it is often misunderstood, leading to misconceptions about what it is and how it works. These are some of the more common myths about factoring along with the actual facts that debunk them.

Myth #1: Factoring is only for struggling, failing businesses

While factoring is a possible solution for businesses experiencing financial problems, it is more commonly used by growing businesses that need a reliable source of capital. Instead of trying to obtain a bank loan or line of credit, which can be less flexible and difficult to qualify for, businesses can use factoring for quick and easy access to the capital they need to keep growing their business. For many businesses, having a mechanism in place, with ready access to cash when it’s needed, is sound financial management.

Myth #2: Factoring is expensive

Invoice Factoring may not be the least expensive form of financing but, when you add up all of its benefits, it can be less costly than traditional financing. Because bank loans have fixed terms, businesses can end up carrying debt and paying more in interest costs over time. With factoring, businesses can control their financing costs by only paying a fee for temporary access to capital. And, because factoring is considered a transfer of assets, it is not carried as debt on your balance sheet. In addition, providers offer essential back-office services such as invoice verification, billing, and collections, which can reduce a business’s operating costs.

Myth #3: Factoring companies harass your customers

For any factoring company that wants to be successful, it is vital that the relationship between a business and its customers remain positive. A reputable company strives to treat customers professionally and respectfully so they can build on their relationship with the business.

Myth #4: My customers will hate that I’m factoring their invoices

Whether it’s through a bank or a factoring company, businesses use financing to enhance their business and support their growth. Customers generally want to know that a business has sufficient capital to meet their needs. They also know that most businesses use financing to access capital. For many businesses, it’s is a better financing option because it is more responsive to its needs.

Myth #5: Factoring companies won’t work with businesses that are not “established”

Factoring is a fast-growing industry and the market is highly competitive. While you may find that some of the larger and more established providers shy away from smaller businesses, there are many more that will take your business. If your business is growing, you should have no problem finding an up-and-coming provider that wants to grow with you.

Myth #6: I can’t use factoring if I have a low credit score

Another advantage of factoring over traditional financing is your business doesn’t need to have a credit history to qualify for financing. Providers rely on the creditworthiness of the business’s customers in qualifying it for factor financing.

Myth #7: All factoring companies are the same

As with any industry, some factoring companies are better than others. Some operate purely as a middleman between a business and a bank, passing borrowing costs on to their customers. Those that are struggling to achieve profitability tend to skimp on customer service or technology. Some want to lock clients in unfavorable agreements. But most factors are interested in building solid, mutually beneficial relationships with their clients. It’s important to do the research to find the best factoring company for your needs.

While factoring isn’t new, its use is growing among businesses that need more financing options. So, it’s not surprising that there might be some misconceptions. However, when businesses realize that providers want to be a partner in their growth, it can be the beginning of an enduring relationship.

altLINE is a direct source of funds so we are not exposed to borrowing costs that other independent financing and factoring companies pass on to their clients. And, unlike other providers that hide a range of fees, our transparent pricing structure keeps you in control of your financing costs.

If your business needs a responsive and reliable source of capital, contact us about factoring with altLINE and get a free quote today.

What is a Factoring Company?

Chances are if you’re a business owner and you’ve found this article, you’re considering various financing options available to you, one of which may be invoice factoring.

Alternative financing options are becoming more prevalent with the expansion on online lenders, so you may be asking “what is invoice factoring” and “what is a factoring company?”. We’re here to answer those questions. Let’s start at the beginning:

What is Invoice Factoring?

Invoice factoring is the process of selling your accounts receivable to a third party (factoring company) for cash up front. The process if fairly straight forward – you receive 80-90% of the invoice value up front, then the factoring company returns the remainder to you once your customer pays their bill, minus a small factoring fee (1-5%). Because factoring is not a loan, it’s a sale of invoices, it does not impact your credit.

What is a Factoring Company?

A factoring company is a financing partner who helps businesses in need of faster cash flow. These businesses typically face timing challenges of slow-paying customers or need funds to ramp up growth. Factoring companies come in many varieties – independent financiers, financial institutions and multinational corporations to name a few.

Each factoring company has its own way of doing things, but they all share the common function of purchasing a business’s accounts receivable (AR). A business’s AR represents goods or services already produced and delivered to the buyer. The business has invoiced their customer which is why this type of financing is known as invoice factoring.

Why Wouldn’t I Wait for My Customers to Pay?

When you’re trying to grow your business, you often need steady, predictable cash to pay bills, make payroll or invest in other capital. This can be tough if you’re always waiting 30-90 days from when you send an invoice to collect from your customers. Cash flow then becomes unpredictable and often comes in after you need it most.

When you factor your invoices, you’re only waiting on the remaining 10-20% of the invoice amount – the rest is delivered up front. If you know when you’re going to bill your customers, you know exactly when you’ll get your cash. Factoring receivables allows you to let the factoring company wait on payment while you put the cash to work in the meantime.

Why Should I Factor with a Bank?

Banks are different than traditional or independent factoring companies. Unlike the latter, a bank is a direct source of funds, not a middleman. Find our more information about the difference here, or review the helpful infographic below.

Invoice Factoring with a Bank

How Factoring Works

A factoring company works with a business, as well as with the business’s customers (account debtors), to accelerate the movement of cash flow through the business. A detailed look at how factoring works shows the involvement of each party.

What are the advantages and disadvantages of factoring receivables?

There are many advantages of factoring. Here are a few, but you can find more information here.

  • Faster access to cash flow
  • No impact on your credit score (unlike traditional loans)
  • Being able to grow your business without waiting on customers to pay
  • Shorter approval process

At the same time, there are disadvantages to factoring:

  • You sacrifice 1-5% of your invoice value in the factoring fee
  • You risk the factoring company tarnishing your relationship with your customers
  • Some factoring companies will charge hidden fees, making it far more expensive than expected

Find more information

At altLINE, we stand by 100% transparency. We’re a regulated bank that’s been in business since 1936 – we believe in helping our customers grow, and doing it in a trustworthy and honest manner. We want you to ask questions, carefully review your options and decide what’s best for your business. In the link below, you’ll find a Complete Guide to Invoice Factoring that will help provide you with all the details you need to make an informed decision. If you’re ready to speak with a sales representative, or simply get more information, please contact us at (205) 607-0811 or request a free quote.

< Read the Complete Guide to Invoice Factoring