Invoice Factoring

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.

Invoice Factoring 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.

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.

Factoring is 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 review more information about the ins and outs of by reading our complete factoring guide.

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:
https://www.nerdwallet.com/blog/small-business/small-business-invoice-factoring/
https://www.valuepenguin.com/small-business/invoice-factoring-vs-invoice-discounting
https://www.forbes.com/sites/forbesfinancecouncil/2019/03/27/the-evolution-of-factoring-why-its-no-longer-an-f-word/#49e1c37a67ed

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?

If you’re considering various financing options to boost working capital for you business, one of these may be invoice factoring. This article helps you understand what a factoring company is, and how they could help you.

For a more complete overview of invoice factoring, check out our full invoice factoring guide.

What Does a Factoring Company Do?

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 receivables represent goods or services already produced and delivered to the buyer. Because these receivables have value, factors are willing to purchase them, then collect directly from your customers for a small fee.

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.

Which Factoring Company Should I Choose?

Choosing the right factoring company is critical – making the wrong decision could cost your business significant time and money, making your cash flow problem worse. 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, or review the helpful infographic below.

Invoice Factoring with a Bank

How is altLINE different than other factors?

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.

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.

Invoice Factoring for Consulting

If you own or manage a consulting firm, you know that cash flow can be a problem. You incur unusually heavy upfront costs—to hire the best professionals and ensure they receive the ongoing training they need to remain up-to-date.

What’s the Main Cause of The Problem?

However, the very clients you work so hard to help are sometimes hesitant to pay you on time. In addition, the work you do is irregular—you might have 3 projects one month, but none the next. Small business provider Insureon aptly describes the nature of the problem:

“As a management consultant, you’ve helped all kinds of clients improve their profitability, increase their revenue, and manage their finances — so it’s somewhat ironic that small consulting firms often struggle with their own cash flow problems. With the feast or famine nature of your work, consulting firms have highly irregular income and will need to take precautions to weather lean months and ensure they’re saving enough of their revenue during busy times.”

How Do You Improve Cash Flow?

There are several potential solutions to the cash flow problem many consulting firms face. For example, you could require clients to pay an upfront deposit for each project, or offer monthly payment plans. One of the most effective solutions, however, is invoice factoring.

What Is Invoice Factoring?

Invoice factoring is an arrangement where you sell your clients’ invoices to a third-party, called a “factor,” who becomes responsible for collecting payments. The factor typically pays you the majority of the invoice immediately. Once clients have paid invoices in full, the factor deducts its fee and sends you the remainder of collected funds to close the account.

What Are the Benefits of Factoring for Consultants?

Maintaining a healthy business relationship with key clients is critical to your consulting business—one of the chief benefits of invoice factoring is that you can maintain a healthy relationship with clients, since that relationship is no longer muddied by requests for payment, requests that can sometimes lead clients to search for another consulting firm.

In addition, working with a factor can remove the need for your firm to take on additional debt to maintain a healthy cash flow. This is especially important for firms whose credit limit is already stretched. With invoice factoring, you avoid the need to submit to yet another credit check or open an additional line or credit.

How Do I Find the Best Factoring Company for My Business?

Different factoring companies have various levels of expertise, and serve different kinds of businesses. They also have varying fee structures, contract terms and programs. The goal is to find the factoring company which is best for your consulting firm. Doing so requires considering several factors, including the following three:

Make the Best Decision for Your Consulting Business

Successfully managing your consulting firm can be complicated, and you can’t expect yourself to be an expert on every subject. From time to time, you’ll need to work with a trusted and experienced partner, whether you need help with invoice factoring, accounts receivable financing, or asset based lending. To learn more about the ways The Southern Bank Company can help you grow your consulting firm and maximize profits, contact us today.

< Back to the Factoring Guide

Payroll Funding for Staffing Companies

Staffing companies face unique working capital challenges. Nearly all staffing firms face cash crunches. This is primarily the result of the payment terms that the staffing firm’s customers require at the outset of a relationship. However, long payment terms in itself is not necessarily the issue. Nor is it the cash intensive nature of supplying labor or the lower margins of a service based business.

It’s the inability of traditional lenders to lend to staffing businesses which makes the owners’ and operators’ lives so difficult.

Consequently, many staffing companies rely on alternative financing solutions to improve their financial health. One such solution is payroll funding for staffing companies.

What is Payroll Funding for Staffing Companies?

Payroll funding is a means of infusing cash into a staffing firm in order to supplement the firm’s working capital. More often than not, staffing companies are required to pay employees on a weekly or bi-weekly basis. However, their customers remit payment 15 to 30 to 45 plus days later. This gap between when staffing companies must pay their employees and when payment is remitted by their customers causes enormous strain on cash balances

How it works

When an invoice is submitted, the payroll funding company purchases the invoice. This action provides the staffing firm the cash needed to pay employees. The payroll funding company then collects from the staffing company’s customers when payment is remitted weeks later.

The Southern Bank’s Payroll Funding Solution, altLINE

Unlike most traditional lenders, we’re committed to partnering with small and mid-sized staffing firms. The Southern Bank has a working capital solution for staffing companies regardless of a business’s life cycle.

By partnering with The Southern Bank, staffing firms benefit from:

  • Direct bank funding leading to some of the lowest rates in the market
  • An FDIC regulated lender that puts a premium on customer service
  • The confidence in the marketplace of working with a bank

Whether you’ve been in business for two weeks or twenty years, The Southern Bank is willing to structure a payroll funding solution that meets your needs.

Payroll Funding Case Study: Reducing Financing Costs by 42.4%

In this case study, we provide an example of a light industrial staffing firm that reduced its financing costs and improved customer relationships by making the switch.

Company

Temporary Staffing Firm Specializing in Light Industrial with $5,000,000 in Annual Revenue

Background

An East Coast staffing firm had been utilizing an independent financing company for its factoring and payroll funding needs for several years. At the outset, the relationship made sense, as the payroll funding company had staffing experience and provided invoicing, payroll processing, and collections in addition to financing.

The bundled solution was attractive due to its simplicity and the owner was happy to sign up citing the following reasons:

  • Independent financing partner’s staffing industry focus
  • Simplified, bundled service package that includes back-office support
  • Referral from existing Worker’s Compensation broker
  • Lack of financing interest from local, community, and regional banks

Problems with Independent Financing Providers

While the staffing firm’s agreement with the independent financier helped ease the firm’s cash crunches, other problems soon arose.

Unlike traditional financing, payroll funding providers take a more active role in a borrower’s business. While a bundled solution can be beneficial, the bundled solution also shifts many customer service responsibilities from the staffing company to the payroll funding provider. Additionally, these bundled services come at a cost, and determining a fair and competitive price for these services is difficult when it is presented as a single fee.

As this staffing firm’s revenue increased, the owner began to see signs that it had also outgrown its payroll funding provider.

Some of the issues the firm encountered included:

  • Invoices being sent out late, for the wrong amount, or not sent out at all
  • Unprofessional communications by the payroll funding provider with the staffing company’s customers
  • Unexpectedly high fees with little explanation from the financier
  • Delays in the clearance of customer payments and the release of reserve accounts causing cash flow problems

The staffing firm knew that it was time to make a change and take more control of their business.  The owner notified its current payroll funding provider of their termination prior to their sixty day renewal, and engaged The Southern Bank in financing discussions.

Solution

In response, The Southern Bank worked with the staffing firm to scope out and implement a new payroll funding solution that better met their current needs.

By engaging with The Southern Bank, the staffing company benefited from:

  • A 42.4% reduction in financing costs due to a simplified rate structure
  • The transition of invoicing responsibilities back to the staffing firm, allowing them to better manage customer relationships and reduce confusion
  • A reduction in average day’s receivables outstanding from 32 days to 24 days
  • The elimination of lockbox fees and other administrative fees
  • Improved customer relations due to a higher degree of professionalism from bank representation
  • Greater financial clarity and control after “unbundling” bank office services

Conclusion

By financing with an FDIC member bank, the staffing firm was able to cut out the middle man and reduce payroll funding costs significantly. More importantly, The Southern Bank’s payroll funding offered the staffing client more control over their business resulting in improved customer relationships.

Choosing the Best Factoring Company

With so many options, choosing the best factoring company for your business may seem overwhelming. No two factoring companies do things exactly the same – they specialize in different industries, offer different terms and use different language. These differences make comparing factoring companies difficult.

Five questions to ask before choosing a factoring company:

1. How long have you been in business?

The best factoring companies have experience in the industry. Anyone with access to capital can set up a factoring operation, so by selecting a partner with several years of experience you automatically eliminate those factoring companies without a proven and stable operating history. The best factoring companies have invested time in improving procedures and protocols to give your business and your customers the best possible experience.

The International Factoring Association (IFA)’s latest Factoring Industry Survey states that 25% of factoring companies surveyed have been in business five years or less. While the influx of new factoring companies ultimately helps businesses through increased competition, make sure that your factoring company has been in business at least two years.

2. What is the factoring company’s terms, fees and funding limits?

The nuances of the financial details present the most variability when choosing the best factoring company for your business. Review proposals and contracts with your accountant to minimize unexpected financial impact.

The terms of the agreement include such aspects as contract length and whether every (or select) invoices will be factored. The industry standard is one to two years for an agreement term. Agreements typically auto-renew if 60 or 90-day notice isn’t given. Some factoring companies require factoring all invoices, while others allow for select invoices to be factored.

Fees can quickly add up and affect your bottom line. The best factoring companies present fees in an upfront manner and don’t try to sneak them in. Some fees to look out for include:

  • application fee
  • monitoring fee
  • credit reporting fee
  • fee for adding a new factoring customer
  • ACH fee
  • wire fee – for all wire transfers the Federal Reserve charges a convenience fee, but some factoring companies increase that fee
  • monthly volume fee – while this is a common fee to ensure the factoring partnership is being utilized, watch out for excessive rates
  • early termination fee – another common fee, but watch for high rates and long notification period

The funding limit describes the capacity of the line your business will be able to receive. Whether $100,000 or $100,000,000, you want a factoring partner who openly discusses these limitations. As your business grows, you’ll want to have a plan for the next phase. You don’t want to wait until you’re up against the limit to make the plan. Find a partner who can grow with you.

3. How frequently and quickly will our invoices be funded and payments applied?

The best factoring companies allow a business to submit and factor invoices daily. The business presents the invoices, while the factoring team processes and funds within 12-24 hours. Since some factoring companies take longer to process and fund your receivables, make sure your factoring company’s speed matches your cash flow needs.

When your customers’ payments arrive in the lockbox, you want the payment amount applied to your account quickly. The “float” impacts your outstanding balance and the amount of your factoring fees, so can significantly affect your bottom line. Look for payments to be applied daily.

4. How will the factoring company interact with your customers?

The best factoring companies receive your consent to interact with your customers. In these scenarios you’re aware of communication with your most valuable relationships – your customers. Many factoring companies will reach out to your customers whether or not you’re aware of it. This type of unexpected communication can build tension in a customer relationship. Find a factoring partner who is willing to take additional steps to make you feel comfortable with the level of interaction and keeps you informed of the contact.

5. Where are the factoring company’s funds coming from?

The funds that the factoring company advances you are coming from somewhere. Find out where. Knowing the origins will help you better understand how competitive your cost of funds is, and how likely it is that they factor will have funds available when you need them most.

The three main qualities of a good factoring company:

1. Flexibility

First and foremost, don’t get locked in to a long-term contract. Contracts with one year terms are one thing and should be expected. Contracts with multi-year terms and significant or even undefined termination penalties should be avoided like the plague.

Similarly, if your factoring agreement states that you must sell all of your receivables regardless of your need to do so, you should start looking around. Your factoring arrangement should mimic the flexibility of a traditional line of credit.

If your factor is not open to discussing these terms, shop around and keep looking.

2. Stability

If your factoring company is borrowing its money from a bank and then utilizing its line to purchase your receivables, then there are two important things to note:

  • The cost of borrowing their funds from their bank is likely passed through to your business in the form of higher rates.
  • The stability and security of your funding is reliant on your factoring company’s ability to remain in the good graces of their bank.

The easiest way to ensure your factor is providing a direct source of funds is to work with the source of funds itself – a bank. Alternatively, if your factor is an independent financing company, ask where they get their funding from and how long they’ve maintained that relationship.

In the event of economic turmoil, you’ll want to know that your financing partner won’t be cut off.

3. Professionalism

How do you know if your factor is professional and reputable? Just look at their interactions with your business in the buying process.

  • Are they not only knowledgeable about their own products but your business as well?
  • Is their pricing straightforward with no lockbox fees, transaction fees, clearance fees, etc.?
  • Are they responsive to your calls, emails, and questions?
  • Will they preserve good relationships with your customers?

Let us help make choosing a factoring company easy.

Looking for a good factoring company?  Not sure if you’re getting the full story from your current factoring partner? Don’t hesitate to contact us today and we’d be happy to provide our thoughts and help guide you in your decision process.

Why is Factoring with a Bank Better?

What is Bank Factoring?

Factoring is a transaction between a business and a third-party (the factor) which provides quick cash flow in exchange for accounts receivable and/or other assets. A business can use its invoices (accounts receivable) as leverage or sell off accounts receivable to the factor to obtain cash. Depending on the arrangement, the cash is either discounted or reduced by fees charged by the factor. A bank factoring company uses the same steps as a traditional factor, but requires the factor to be a regulated bank. There are many nuances and differences between traditional financing companies and banks that offer factoring. Each provider has its own way of defining the types of factoring available.

With altLINE we break out our accounts receivable-based products into three structures:

  1. The first is asset based lending which is a loan secured by business assets. The collateral is either the inventory, accounts receivable or balance sheet assets. Since asset lending is similar to a revolving line of credit, the business can borrow from assets on a continual basis to cover expenses as needed.
  2. In accounts receivable financing, a business sells the value of its invoices to a third-party factor (ie. independent factoring company or a factoring bank) at a discount. The third-party processes the invoices and the business receives funds based on the expected money due from their client (the debtor). This structure operates similarly to a line of line of credit.
  3. Invoice factoring is the third method, in which a business sells invoices to the third-party (the factor). The factor gives the business a percentage of the total value of invoices and collects invoice payments from the business’ client. After the client pays the invoice, the factor pays the business the remainder of the money collected and keeps back a transaction fee.

As a bank factoring company, altLINE offers various accounts receivable financing structures to fit the varying needs of a business.

Benefits of Factoring

Factoring is not a loan thereby no liability is reflected on the balance sheet. It establishes steady cash flow and eliminates the 30, 60, 90-day waiting period for the accounts receivable of a business. The factor manages invoices and implements credit reviews of the clients for the business. The factor advances funds against invoices and collects money owed by the business clients. Time management is optimized and the business can direct its energy towards sales, market expansion, and other endeavors.

Why factor?

1. Funds are advanced to the business before clients pay the invoice for goods received.
2. Factors provide credit control – the collection of funds is managed by the factoring entity.
3. Factoring provides capital while the business has open invoices.
4. Factoring is not a loan since the invoices/accounts are purchased by the factoring entity. They do not show on the books as a liability so this reduces balance sheet debt.
5. Businesses which experience seasonal fluctuations in their business have periods of insolvency; factoring is a means of acquiring cash flow based on money owed by clients.
6. Quick access to funds with invoice factoring – funds available within 48 hours after an invoice is generated.
7. Relief from debt collection.
8. No debt to repay.

Factoring Companies –Many Choices

Since there are limited barriers to entry anyone can start a factoring company. As you would expect, some factoring companies are better than others. Take the time to research and get comfortable with your factoring partner. The two types of factoring companies compared here: independent factors, and bank factors (also known as a factoring bank). Check out this infographic for more information:

Invoice Factoring with a Bank

Independent Factoring Providers

Independent factoring companies work with businesses who need to accelerate cash flow and may have been turned down by a bank. A business with creditworthy customers may be eligible to factor even if it can’t qualify for a loan. In factoring, the lender is primarily concerned with the creditworthiness of the client versus the business.

Bank Factoring Providers

A bank factoring company provides the same flexibility and benefits as an independent factor, but also offers additional advantages.

A bank factor works with many businesses who are considered outside of the traditional credit box. Many of these businesses have been told “no” by a bank for a commercial loan, but they are still very strong candidates for working with a bank that offers factoring, or accounts receivable financing financing. Businesses that work with a bank owned factoring company may also have an easier time transitioning to a commercial loan at a later date.

Banks are more secure and provide a sense of financial stability for the business. A business’s clients are very valuable relationships and a bank offers a level of comfort not found in independent alternative financing companies. Clients feel better about interacting with a bank than an unfamiliar or unknown business entity.

In addition, since the bank has its own funds, it can offer the business very competitive rates. Unlike many independent factoring companies who work with multiple funding sources, a bank acts as a direct source of funds and eliminates the middleman.

Factoring is a common solution to cash flow and is best used during growth periods or when the account receivables are large. The business benefits since the time between delivery of goods and funds realized is short. The business is relieved of the burden of chasing debt and can focus on other pertinent issues.

Contact us today to see how factoring with a bank can help your business grow.

Factoring for Manufacturing

Earning a top position among manufacturing companies is becoming increasingly difficult due to the rapidly changing landscape of the manufacturing industry. Amid the many challenges facing manufacturers today are employee skills gaps, cash flow hindrances, and keeping up with innovation.

Here at altLINE, our team specializes in invoice factoring for manufacturing companies. Below we look at the top three challenges facing companies as they strive to prosper in the increasingly competitive manufacturing industry.

Why Factoring is a Good Fit for the Manufacturing Industry

Invoice factoring can make a big impact in a short amount of time. It is particularly effective because it can generate cash quickly with little impact on the customer relationship. Since a factoring company advances funds against outstanding invoices, customers do not feel pressured to pay invoices more quickly than originally stipulated.

A manufacturer should consider their customer’s credit quality, payment history, and longevity prior to using invoice factoring to address cash flow problems. Factoring companies will use those criteria to assess a manufacturer’s fit for invoice factoring. Find out more about which type of financing is best for your business.

Challenge 1: Skills Gap

Since the end of the recession in 2009, job postings in the manufacturing industry have increased 280% while the percentage of people hired has risen at a small fraction of that rate. The Wall Street Journal and other sources point to a skills gap to explain why thousands of manufacturing jobs were unfilled despite the number of open positions being the highest since 2001. Specifically, today’s manufacturing jobs require a host of technical skills which applicants lack.

While manufacturers do not have direct control over the statistics above, they can meet the skills gap challenge head on with a strong commitment to robust on-the-job training. Employers must be more willing to hire motivated job candidates who display basic proficiency for a manufacturing position and a strong aptitude for learning. Then, they must follow through by keeping employees engaged in the training process.

Challenge 2: Cash Flow Problems

Cash flow problems can present a serious threat to manufacturers, especially when they arise during peak seasons. Many factors cause cash flow problems, but there are several reasons why manufactures find themselves short on cash. The majority of these problems relate to slow paying customers or the receipt of an unexpected large order that becomes difficult to fill.

The good news about cash flow problems lies in the wide array of options to resolving them. The key to conquering cash flow problems is to adopt one or more of the following strategies:

  • Screen new clients more carefully before extending payment terms
  • Offer discounts or other incentives to customers who pay in advance
  • Strengthen your collections efforts to obtain payment from delinquent clients
  • Utilize invoice factoring to revitalize your cash flow

Challenge #3: Increased Automation and Innovation

The benefits of automation are undeniable. Increased efficiency, a reduction in errors, and faster production comprise three of the most impressive benefits offered by automation. However, automation requires investment and a culture of innovation. Manufacturers must be ready to address these potential growing pains associated with the introduction of automation:

  • Resistance to change exhibited by long-time employees
  • The need for increased emphasis on training of employees to oversee complex automation tools
  • The possibility that they will ultimately need to reduce the number of full-time employees due to automation

Successfully introducing automation to an organization requires an employer be prepared for potential employee resistance and to develop a more robust training platform. Additionally, manufacturers should highlight the ways that automation will benefit each individual employee. If employees see how they can benefit from automation, they will be more accepting of innovative changes.

Here at altLINE, our team understands the industry specific needs of our clients. Our manufacturing clients rely on us to know their business’s unique challenges.

Contact us today to discuss invoice factoring for your manufacturing company.

Staffing Companies: A Breakdown of Financing

Running a successful staffing company requires managing multiple priorities, relationships and partnerships. This balance often presents a tough challenge even for seasoned staffing professionals. Staffing companies that find the right employees and reliable partners stand to enjoy greater profitability and growth.

In this post, we’ll address key points related to financing for staffing companies: industry growth trends, lenders offering financing for staffing companies and common reasons a staffing company needs to revisit its financing.

Growth Across Staffing Industry

Companies across the globe are outsourcing job functions at record levels. According to a recent Deloitte survey, businesses expect an increase in outsourcing across all major job functions including IT, Legal, Real Estate/Facilities, Finance, Human Resources and IT. Among the survey respondents, 36% cite planned increases in outsourced finance functions, 32% in human resources functions and 32% in IT. These three categories present the highest future opportunities for outsourcing growth.

Further support of growth across the staffing industry comes from Staffing Industry Analysts (SIA). SIA compiled comprehensive data on measuring the gig economy to capture the growing number of people and expanding payroll represented by the US contingent workforce. According to the research, “an estimated 44 million people took on gig work in the US in 2015 with 29% of all US workers performing gig/contingent work last year. Total spending on gig work in the US was $792 billon.”

These numbers present a promising story for staffing companies. More businesses are turning to contingent or temporary agencies for workforce solutions. A growing number of businesses appreciate the skills, knowledge and flexibility of the contingent workforce. Staffing companies well-positioned to leverage this trend can benefit from the immense growth opportunities.

Staffing Companies Need Capital to Keep Up

Growth-oriented staffing companies require capital to take advantage of the current industry trends. Whether a staffing firm plans to bid for new contracts or seeks areas to invest in for competitive advantages (such as training, marketing or technology improvements), the company needs a dependable source of financing. A partnership with a reputable and reliable financing partner sets the foundation for funding growth opportunities.

Payroll Funding for New Contracts

When a new contract comes in, expenses immediately follow. Most notably, payroll expenses for a staffing firm’s contingent workforce begin right away. The staffing company places workers at the job site and typically starts paying those employees weekly or biweekly. The staffing company fronts the payroll expense until the client receives and pays the invoice.

This lag in time may equate to as long as 30-60 days and causes cash flow problems for many businesses, particularly staffing companies. In this case, additional capital helps to ‘solve the cash flow crunch’ or ‘bridge the gap.’ This type of financing used by staffing companies is known as payroll funding or payroll financing.

Investment in Competitive Advantages

Staffing companies face stiff competition, and investment in competitive advantages can position an agency for growth. Some staffing companies utilize advanced training or specialized programming to enhance the skills of temporary employees.

For example, temporary agencies placing light industrial workers may see training related to hand-eye coordination, equipment operation and stack-and-sort job functions as a worthwhile investment. For administrative and clerical temporary positions, education around new organizational productivity techniques or software training may provide a competitive edge for a staffing company.

Staffing Company Financing Partners

Thus far, we’ve acknowledged growth trends across the staffing industry and addressed why staffing companies need capital. Next, we’ll review the types of financing partners temporary staffing companies turn to and how these differ. In our assessment, we’ll evaluate traditional banks, independent financing companies, traditional payroll funding companies, and specialized staffing lenders.

Traditional Bank Financing is Hard to Find

A bank is typically a staffing company’s first stop for financing. Established staffing companies have an existing relationship with their banking partner, so it’s a natural starting point. While a bank loan or line of credit offers preferred terms and reputational benefits, many traditional banks turn away staffing companies due to a lack of hard assets. Most banks view staffing businesses as beyond their ‘credit box’ or the tightly defined parameters for assessing the risk associated with a borrower. Some staffing companies may be eligible for traditional bank financing, but even then tight limitations exist which we’ll address in a later section.

Traditional Payroll Funding Company

Payroll funding providers present another avenue for a staffing company to access capital. Traditional payroll funding companies offer broad flexibility in who they’ll work with in terms of size and performance level of the company. However, a staffing company pays a substantial premium on the cost of capital when working with a traditional payroll funding provider.

Traditional payroll funding companies bundle multiple payroll services together, so it becomes difficult to know the price of the payroll funding service independent of the other services. Bundled payroll services may include payroll processing, tax processing services, staffing software, credit and collection services and more. A complete payroll solution appears convenient and easy, but upon further analysis the costs to the staffing company are significantly higher than if the company looks to a direct source of payroll funding.

Independent Financing Companies

Independent finance companies offer highly creative and flexible commercial lending options. These companies do not operate under the same rules and regulations as banks and financial institutions, so they can be more lenient in who they’ll do business with and the types of deal structures.

Since independent finance companies work with all types of businesses across all industries, they lack specialization in any particular industry. Only a financing partner with a specialty in the staffing industry understands the unique challenges of a staffing business.

Also, independent finance companies borrow money from another source to lend to businesses, including staffing companies. These funds incur additional costs, so are more expensive for staffing companies than direct sources of funds.

Specialty Staffing Lender with Direct Source of Funds

Here at altLINE, we’re well-positioned to help staffing companies achieve growth and expansion as a direct source of funds and staffing specialized lender. As a bank, our borrowers enjoy access to a direct source of funds. Our bank has a solid deposit base funding our operation, so we do not turn to an outside lender. This equates to cost savings.

Unlike traditional banks options, The Southern Bank’s staffing division works with staffing companies from the startup stage through those established companies in expansion mode. We offer a broad range of bank financing options for staffing companies, including Payroll Funding, Accounts Receivable Financing and Asset Based Loans.

Most Common Reasons Staffing Companies Finance with Us

The Southern Bank proudly serves an impressive roster of growth-oriented staffing companies nationwide. With each new staffing client who comes aboard, we seek to understand their motivation. The same top reasons frequently come up when a new staffing client answers the question “What circumstances led you to look to us for your financing needs?”

Startup Staffing Company

Launching a startup staffing company requires a sizable initial investment. At a minimum, the upcoming company needs capital for office space rent, technology needs and payroll. Traditional bank financing requires two years of operating history. Between the lack of operating history and lack of assets, a traditional bank simply can’t offer funding to a startup staffing company.

While we are a bank, we are much better equipped to handle and ready to take on financing relationships with startup staffing companies. Our staffing division offers an array of borrowing options for startups seeking to take advantage of borrowing against their accounts receivable.

Line of Credit Capped

Some staffing companies do qualify for traditional bank financing. With at least two years of operating history and solid profitability, a bank may offer a line of credit to a staffing company if the business owner pledges personal collateral. This arrangement may last for some time, however often the staffing company outgrows the line and their borrowing ability is capped. In these cases, when the staffing company goes back to the bank for a line increase they will often be denied.

Many of our clients have experienced this scenario with their primary banking relationship. Their line of credit is capped and their bank can’t lend anything further. We work in tandem with the primary banking partner. We do not seek to take over the primary banking relationship. Our business model solely addresses the financing piece for staffing companies.

Avoid Violating a Loan Covenant

Some staffing companies with traditional bank financing products may operate under covenants. A loan covenant is a condition that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions. Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called.

In a move to avoid tripping a covenant, staffing companies often look to us for access to capital. Utilizing accounts receivable to fund growth doesn’t require incurring additional debt which is often a restrictive financial covenant in play.

Choosing the Right Payroll Financing Partner

Finding a financing partner who specializes in your industry, can grow with you, and offers competitive rates and services will make a big difference in your future. Many deal structures and financing facilities exist. Be sure to find a partner you who can answer your questions with direct answers. An industry resource, Payrollfunding.com, assembled a list of questions to ask for finding the best provider.

Invoice Factoring vs Bank Loans

The comparison of factoring vs bank loans comes up often among businesses looking to access working capital. As a factoring bank, altLINE by The Southern Bank offers a unique perspective on answering this question. We provide businesses in all industries and sizes a broad range of commercial lending options. These include invoice factoring and traditional bank loans. We also help transition borrowers from factoring to traditional bank loans.

Factoring & Bank Loan Comparison

While factoring and bank loans both inject much needed capital into a business, the two options are more different than alike. Here, we’ll assess factoring vs bank loans to give business owner’s an idea of how these two financing options compare.

Need for Funding

Every business needs funding at some point – to get started, meet payroll, invest in marketing or cover other expenses. Self-funding or borrowing from friends and family often serves as an initial starting place. A business’s primary banking relationship often becomes the next step in the quest for funding. Even though the bank may know the business and owners personally, meeting the lending criteria for traditional bank loans has become very difficult. In cases like this, exploring the differences between factoring and bank loans, as well as other alternate funding sources, makes sense for businesses trying to fully evaluate their financing options.

Bank Loans are More Difficult to Secure

Although the lending market has strengthened in recent years, the effects of the last financial crisis are still being felt by business owners. In the wake of tightening underwriting criteria, many businesses have faced turndowns by a bank. Bank underwriting criteria are notoriously stringent. As a baseline, applicants need a business plan and solid credit profile to be considered for a line of credit or loan. From there, the “5 Cs” of credit analysis also weigh into the decision.

The “Five Cs” a Bank Uses to Assess a Borrower

  • Capacity – Ability to repay, cash flow of business, timing for repayment
  • Capital – Money you personally have in the business
  • Collateral – For a secured loan, the assets that you will pledge
  • Conditions – What the money will be used for
  • Character – General impression of the individual

With all this information the bank will then make a risk determination and assess confidence in the business’s ability to repay the commitment. The bottom line is that traditional loans are hard to secure. Even if a business does get approved for a loan, it’s often not for the full required amount the business needs.

If the Bank Tells you “No”

While a business should explore traditional options, management should not get discouraged if the bank comes back with a “no” for a loan or line of credit request. It is not uncommon for a business to be turned down. Even if the bank can’t extend a traditional bank loan, the bank can provide a referral for an alternative type of funding if one is not available in-house.

Here at altLINE, we maintain the unique position of serving businesses as a factoring bank. When a primary banking partner can’t help, we step in as a FDIC-insured factoring partner to help the business in need.

Independent factoring companies also operate in this space. Many of these companies function as a middleman and don’t have the same direct access and low cost of funds as a factoring bank partner. There is also a lot of buzz around online lenders and newer alternative funding sources.

Many of these companies lead with very low teaser rates or sneak in complicated deal structures. As you determine if factoring or another alternative funding option can work for your business, be sure to fully vet a stable and trustworthy financing partner.

Is Factoring a Fit?

When traditional bank loans aren’t a fit, invoice factoring provides a fast and flexible way to fund a business. Factoring helps a business unlock the value tied up in its accounts receivable. Factoring allows business-to-business firms the ability to get out from under a cash crunch by accelerating the business’s cash flow.

Read more information about how invoice factoring works.

Although factoring has been around as long as people have been trading goods, many business owners don’t know about factoring. Since most business owners have an understanding of how traditional bank loans work, we’ll take a look at factoring vs bank loans from this perspective.

Breaking Down the Difference

As the chart below summarizes, speed and flexibility are the drivers behind the difference between factoring vs. bank loans. factoring vs bank loans

 

Making the Best Decision for Your Business

If you meet the requirements for a traditional bank loan, this may be your best option. However, for many businesses out there who have poor credit, limited operating history or limited assets to borrow against, those loans and lines of credit may not be an option.

For those businesses, we recommend learning more about invoice factoring and finding out how it might be a more efficient, affordable and reliable alternative form of cash flow financing.

 

 

What is Factoring? 10 FAQs

Q: What is factoring?

A: Factoring, also known as invoice factoring, allows a business to receive money owed to it in advance of collection. Rather than waiting 30, 60 or 90 days to receive payment, factoring provides a business-to-business company with much faster access to its money.

Q: How does factoring work?

A: A business engages with a factoring company  or independent financing company to create a factoring partnership. In this arrangement, the business sells its accounts receivable or outstanding invoices. The steps include:

1. The business sends a copy of the invoice to the factoring company.
2. The factoring company quickly advances 80-90% of the invoice amount into to the business’s bank account.
3. The business’s customer sends payment to a lockbox in the business’s name according to payment terms.
4. The factor releases the remaining 10-20% minus a small administrative fee into the business’s bank account.
5. The factoring arrangement gives the business faster access to cash, allowing the business to use the money immediately as it sees fit.

See this post for more detail on the factoring process.

Q: Is factoring expensive?

A: Factoring offers flexibility when traditional financing options aren’t a fit. Factoring rates tend to be higher than conventional business loan rates, but great variability exists among how different factoring companies structure deals. Finding a reputable partner with a transparent pricing strategy will ensure the business gets a competitive deal.

Q: Who uses factoring?

A: Many companies use factoring to help accelerate cash flow. A business-to business company generating invoices with payment terms may be good candidate for invoice factoring. Industries using factoring most frequently include:

• Staffing
• Distribution
• Facility Services
• Manufacturing
• Transportation
• Consulting
• Food & Beverage
• Wholesale
• Professional Services
• Textile & Apparel
• Oil & Gas
• Janitorial Services

Q: What will my customers think about factoring?

A: According to the Global Factoring Market 2016-2020 report, analysts expect factoring to grow over 10% annually for the next several years. With more companies utilizing invoice factoring, it continues to grow as a necessary and responsible way for financing a business. Understanding the manner and circumstances in which the factoring company will communicate with the business’s customers is important. As long as the communications are professional and in line with the business’s message, customers don’t typically have any issues.

 

questions about factoring

 

Q: When do companies use factoring?

A: Companies utilize factoring as a cash flow accelerator in many circumstances. A few of the most common uses include to:

• Purchase inventory or capital equipment
• Invest in marketing
• Meet payroll
• Meet tax requirements
• Obtain better payment terms by paying faster

Q: Why use factoring over other types of financing?

A: Factoring helps businesses accelerate their cash flow and secure financing in a debt-free manner. The sale of the business’s invoices funds the growth, so the business owner maintains control and doesn’t have to give up any equity or ownership. With factoring, the availability of cash keeps extending and growing as your business expands.

Q: Is factoring the same as a loan?

A: No, factoring is not a loan. The business does not incur debt. The business sells its accounts receivable (invoices) to the factoring company.

Q: Can a start-up business use factoring?

A: Yes, a start-up business may be an ideal candidate for invoice factoring. While traditional lending options often require two years of operating history and a track record of profitability, factoring provides greater flexibility.

Q: Will personal credit issues restrict a business owner from using factoring?

A: No, personal credit issues alone won’t keep a business from being approved for a factoring partnership. A host of factors go into the credit decision, with the most weight on the credit quality of the business’s customers. Some business owners using factoring have experienced bankruptcy, tax liens and other financial circumstances that make traditional lending options difficult to secure.

< Back to the Factoring Guide

Is Invoice Factoring the Same as AR Financing?

Does your business need financing to grow or improve cash flow? If so, invoice factoring and accounts receivable financing may be options you’re exploring. A tremendous amount of information exists online, but the viewpoints often prove more confusing than helpful. Many financing and factoring companies use the terms factoring and accounts receivable financing interchangeably. In this post, we’ll address the similarities and differences of factoring and accounts receivable financing as we see it. For a quick overview, see the Financing Product Comparison table.

What is Invoice Factoring?

In a previous post, we define invoice factoring as a type of commercial finance that converts outstanding invoices into immediate cash. Factoring serves as a reliable alternative to a line of credit and helps businesses who:

  • Face slow-paying customers
  • Experience seasonality
  • Want to grow and expand
  • Want to launch as a start-up

How Invoice Factoring Works

In factoring, a business sells its invoices to a third party factor. The business can choose which invoices it wants to factor. The business presents a schedule (most often daily or weekly) to the factoring company detailing which invoices to factor. Then, the factoring company immediately advances a pre-determined percentage (typically 70-90%) of that total invoice value into the business’s checking account. Once the debtor pays the invoice under the payment terms, the factoring company pays out the remaining invoice amount less a small administrative fee. Thus, invoice factoring is an ideal financing solution for a business not wanting to wait 30,60 or 90 days for their receivables to roll in.

What is AR Financing?

Accounts receivable (AR) financing also uses outstanding invoices to fund growth.  Like invoice factoring, AR financing serves as another alternative to a traditional line of credit and helps businesses who:

  • Expect steady growth and expansion
  • Experience seasonality
  • May not be in a position for a traditional bank loan, but working towards it

How AR Financing Works

In accounts receivable financing, a business sells all of its invoices to establish a borrowing base. Similar to a traditional line of credit, the receivables line operates as a revolver. So, in AR financing the receivables are pooled.

Similar, Yet Different

Both invoice factoring and AR financing benefit businesses by providing funds in advance of collection. When cash flow timing matters most, both of these financing options quickly put money into the business. In addition, both offer professional credit services and receivables management.

The main difference between invoice factoring and AR financing lies in the underwriting criteria of the deal structures. While factoring offers greater flexibility, AR financing has more strictness around the credit profile. Consequently, AR financing typically offers preferred financing terms.

Answering Your Questions

Here at The Southern Bank, transparency defines our approach. If you’re like most of our customers, getting straight forward answers and understanding the detailed financial implications to your business are key factors in your financing decision. We explain and clarify along the way so you aren’t left wondering what you signed up for. Researching partners and need a question answered? Contact us and get your questions answered today.

< Back to the Factoring Guide

Switching Factoring Companies

As with any financing relationship, make it a priority to understand your exit strategy options with your factoring company. Before you enter into the relationship, ensure you know the steps to take and associated penalties in case you need to break the contract.

When is the Right Time to Switch Factoring Companies?

Switching your financing partner to another factoring company may be beneficial in situations including:

  • Better pricing found elsewhere
  • Unsatisfactory level of service with current funding partner
  • Desire to switch to a partner with expertise in your industry

In the event of an early termination, several factors you’ll need to be aware of include: length of agreement, auto-renewals, window for notification, early termination fees and other penalties associated with terminating.

In addition to exit terms, we’ll be taking a closer look at three other important areas of an invoice factoring agreement in separate posts: float, fee structure and notice of assignment.

Reasons You May Want to Switch

There is a number of reasons a business may want to switch to a different invoice factoring provider. However, we find that the reasons below are most common across industries.

Length of Agreement with a Factoring Company

A one (1) year term is the most common length of an invoice factoring agreement. However, terms lasting as long as two and three years exist with some factoring companies. A shorter term equates to more flexibility. For optimal flexibility, don’t agree to terms longer than one year.

Auto-renewal and Window for Notification

The length of agreement (term) also becomes a factor with the auto-renewal clause. Most factoring agreements automatically renew for another subsequent term without termination notice. For example, if your two-year contract expires in June of 2017 and you miss the window for notification, you are automatically locked in for another two years or until at least June of 2019.

Know your auto-renewal date (typically the date the contract was signed). More importantly, know the window for notification. Two to three months is the most common window for notification, but longer lead times do exist. Mark the notification date on your calendar and have a conversation with your factoring company. By not giving notice, you will automatically be locked in for another term and will not have an opportunity to reevaluate your position and negotiate a better deal.

Early Termination Fees by Factoring Companies

Setting up the relationship requires time and resources by the factoring company at the onset, so it typically takes the contract term to recover those costs. Factoring companies ensure they cover these costs by imposing early termination fees.

A simple and common early termination fee is calculated as (monthly minimum fee X the number of months remaining in the term). Look for these variables to be outlined in your invoice factoring agreement. Another calculation could be (monthly minimum volume X a pre-determined percentage). Crunch the numbers before signing your agreement to understand what an early termination would cost.

Find the Best Factoring Partner for Your Business

To recap, when you sign an agreement with a factoring company:
1. Remember a shorter term is best, don’t sign multi-year agreements
2. Know your notification date and set up a calendar reminder to review the agreement each year
3. Understand how much it would cost to exit your agreement early in case you find yourself wanting to go with another partner

Read our invoice factoring guide to find a complete review of everything you should know before making a qualified decision.

Invoice Factoring: Notice of Assignment

If you’re a business owner considering invoice factoring, the Notice of Assignment (NOA) may cause you some concern. What will my customers think? Why is it necessary? Can we skip sending it? Let’s address these questions to clarify what the NOA covers and put to rest any lingering apprehension.

What is a Factoring Notice of Assignment?

The notice of assignment (NOA) informs your customer that a third party (bank, financing company, or factoring company) will manage and collect your accounts receivable (AR) going forward. The NOA arrives in the mail in the format of a letter, as the initial communication notifying your customers of the change in structure and process.

What will my Customers Think?

Tremendous growth in the use of invoice factoring across many industries has made factoring more common than ever. According to the Global Factoring Market 2016-2020 report, analysts expect factoring to grow over 10% annually for the next several years.

Many of our factoring clients work with Fortune 500 companies who simply demand longer payment terms in order to do business. Clients using invoice factoring often show an appetite for accelerating growth and more efficiently managing operations and collections.

In short, you are most likely more concerned about it than your customers. Factoring is a widely used and acceptable means for financing your business.

Why is a Notice of Assignment Important?

In a factoring relationship, a business sells the future collection of accounts receivable (AR) in exchange for cash advances. So, the asset (future AR) belongs to the third party upon completion of the work or delivery of the goods. The business receives the cash advance and the third party waits for payment by the business’s customer.

Due to the intangible nature of AR, the third party provider needs legal language showing ownership of the AR. Thus, the legal language found in the NOA minimizes the risk placed on the third party provider. Third party providers require a NOA. It is critical to the structure of the factoring relationship and protects the third party provider in the event of misdirected payments.

What is Covered in a Notice of Assignment?

The main points covered in a Notice of Assignment include:

  1. Business’s accounts receivable has been assigned and is payable to a third party provider
  2. Updated payment address, typically a lock box
  3. Liability on the customer in the event of misdirected payment

How we’re Different

By working with altLINE and The Southern Bank, your customers recognize the reliability and stability of your financing partner. Rather than receiving a NOA from an unknown entity or independent financing company, the bank’s reputation as the lender of choice strengthens your customer relationship.

To find out everything you need to know before making an informed decision, read our complete guide to invoice factoring.

Is Invoice Factoring Float Costing You?

Every invoice factoring company structures a deal a little differently, so it’s often difficult to compare proposals. By focusing on a few key aspects of invoice factoring agreements, we aim to help business owners make better, more informed financing decisions. We’ll be taking a closer look at four important areas of an invoice factoring agreement: exit terms, float, fee structure and notice of assignment.

“Float” tops the list of often unnoticed or misunderstood variables affecting the true cost of an invoice factoring arrangement. In fact, float days combined with common factoring pricing structures can increase your financing costs by more than 40%.

What is Invoice Factoring Float?

In finance, the term “float” can mean a lot of things. In invoice factoring relationships, float refers to the difference between the time the finance company receives a payment and when it gives the factoring customer credit for the payment.

Putting it in simpler terms, when payment is made by check or ACH, the transfer of money from bank account to bank account does not happen instantaneously. Instead, payments take a certain amount of time to clear. This period is often referred to as the float.

What are Float Days?

In a contract, float days are a time allowance for check clearance and may also be called clearance days.  A specific number of float days will be outlined in the invoice factoring contract. Look for these in the fine print – float days are likely to be left unexplained and accepted at face value, but it’s important to recognize their impact.

Are Float Days Standard in Contracts?

Yes, float days are always present in invoice factoring agreements. First and foremost, the float provision helps protect the lender from bad checks or payments. Secondly, the lender continues to accrue interest during the float period. Three days is an industry standard, but longer terms of up to five float days is common.

 

invoice factoring float

 

How do Float Days Affect my Factoring Rate?

Float days are additional calendar days tacked on to the date the payment is received. In financing relationships with simple interest rate structures, float days are relatively harmless.

However, in factoring relationships with tiered fee structures, float days can have an enormous negative impact on your true financing costs. In these structures, the float is akin to a hidden fee that many factoring companies utilize to increase their returns at the borrower’s expense.

Let’s take a look at a real world example. Here’s a fee structure one of our customers had with an independent factoring company:

 

 

In this same contract, the factor had a 3 day float provision. 3 extra days of fees after a customer payment was received. No big deal, right?

Wrong. The impact of this tiered pricing structure with a 3 day float provision increased their annual financing costs by 42%. And the worst part was that they had no idea how or why.

A Deeper Look at Factoring Float

This particular company had two large customers that were on Net 30 terms. These companies paid like clockwork via ACH on either day 28, 29, 30. According to the rate table above, an invoice received on day 28 would appear to be charged a factor fee of 1.50%. However, with a 3 day float the invoice is actually not credited until Day 31. The resulting factor fee is actually 2.50% of the face value of the invoice. What may seem like a small three day hold period actually equates to a 66% higher fee on those on time payments.

With these two large, prompt paying customers making up a significant portion of their business, the company’s annual financing costs were 42% higher – an increase entirely due to a tiered rate structure and 3 extra days of float.

The Impact of Float on Rate Table

 

Why Isn’t Float Discussed?

Most invoice factoring clients can tell you their discount rate, but don’t understand the impact of float. Float is often left out of conversations and proposals, and often unrecognized by borrowers well into a factoring relationship.

Since float days equate to higher fees, the topic is rarely discussed in significant depth. However, business owners should run the numbers to fully understand what the effective rate will be once float days are added into the calculation.

Why altLINE Is Different than Other Factors

Here at altLINE, we put an enormous emphasis on pricing transparency. Our goal is to ensure each customer knows exactly what they’re paying.

As such, our factoring program provides immediate reconciliation and application of debtor payments. More simply, when your customer payment arrives for a factored invoice in our lockbox or bank account, the interest and fee clock stops. Regardless of how long the money actually takes to “settle,” you receive credit for the payment the day it arrives.

This means, no more factored invoices mysteriously floating to hire fee rates, no more confusion, and at the end of the day – lower costs.

For more information about all aspects of invoice factoring, read our complete guide today.

What is Invoice Factoring?

Invoice factoring is a financing arrangement that gives a business fast access to cash. Many small businesses in need of working capital utilize factoring as a reliable alternative to a traditional line of credit.

When cash flow strains a business, invoice factoring unlocks the value tied up in the business’s accounts receivable. Also, the term factoring is often used interchangeably with accounts receivable financing. Check out more information on how factoring works, if factoring is a fit for your business, and the how best to choose a factoring company.

How Does Invoice Factoring Work?

An invoice factoring arrangement involves three parties: The Business (the seller of invoices), The Business’s Customer (the debtor) and the Factor (factoring company).

A business sells its invoices to a third party financing partner (factor). Rather than waiting 30, 60 or 90 days for a customer to pay, funds are available to the business within 24 hours.

The five steps of invoice factoring:

  1. The Seller provides a service or delivers a product, then sends an invoice to the Debtor.
  2. The Seller submits that invoice to the Factor for funding (for example, on Day 1)
  3. The Factor advances between 80-90% of the invoice value to the Seller, deposited into their business bank account (for example, on Day 2)
  4. The Debtor mails their payment to the Factor, which goes into a lockbox in the Seller’s name (for example, on Day 25)
  5. The remaining 10-20% of the invoice value is released to the Seller, minus a small Factor fee (for example, on Day 26)

Invoice Factoring in Five Steps

 

Factoring improves cash flow management for new and growing businesses. In addition to providing working capital, it also supports the business with credit verification and payment collections functions.

Payroll Funding Exit Strategy

Before beginning a financing relationship with a funding partner, understand the steps required to terminate the relationship if needed before the end of the term. Complex structure and lengthy verbiage make contracts difficult to decipher, particularly payroll funding agreements. Transparency and clarity are “must haves” in your payroll funding relationship.

Why You May Want to Cancel Your Payroll Funding

Circumstances may arise whereby you want to switch your payroll funding partner, including:

  • A desire to unbundle funding from complete payroll solution
  • Your found a lower cost of funds found elsewhere
  • You’re unhappy with level of service of current funding partner
  • A desire to switch to a staffing finance expert

Several factors relating to early termination you should be aware of include: length of agreement, auto-renewals, window for notification, early termination fees and other penalties associated with terminating.

Things You Should Consider

There are a few things to consider before making the decision to end an invoice factoring or payroll funding agreement. Those include:

Length of the Agreement

The term (length) of payroll funding agreements typically lasts one year. However, terms exist lasting as long as two and three years. Since staffing companies experience business swings and rapid growth opportunities more intensely than many other industries, having flexibility and shorter agreement terms are extremely important. For optimal flexibility, don’t agree to terms longer than one year.

Notification and Auto-renewal

The agreement term also comes into play with the auto-renewal clause. Most payroll funding agreements automatically renew for another subsequent term if you don’t provide advance notification of your intent to terminate the relationship. For example, if your two-year contract expires in April of 2017 and you miss the window for notification, you are automatically locked in for another two years or until at least April of 2019.

Remain aware of your auto-renewal date, but more importantly be mindful of the window of notification. The industry standard for the notification window lasts 60-90 days, but longer lead times do exist. Consider marking the notification date on the calendar and giving notice to your payroll funding partner to at least open up the possibility for a better deal. If not, you will automatically be locked in for another term.

Early Termination Fee

The reason for a termination penalty relates to the upfront expense the funding partner incurs. Setting up the facility requires time and resources at the onset, so it typically takes the contract term to recover those costs.

A standard early termination fee is calculated as (monthly minimum fee X the number of months remaining in the term). The inputs for that calculation should be easily found in your payroll funding agreement. Another calculation could be (monthly minimum volume X a pre-determined percentage).

Make sure you complete these calculations before signing your agreement to understand what it would cost you for early termination. Even with an early termination fee, there may be situations where it’s advantageous or imperative to terminate.

Reviewing Your Payroll Funding Exit Strategy

To recap the most important points of your payroll funding exit strategy:

  1. Don’t sign multi-year agreements
  2. Identify your notification date for early termination and set up a calendar reminder to revisit the agreement each year
  3. Know exactly what it costs to exit your agreement early should you want to go with another partner

At altLINE by The Southern Bank, our successful 80-year banking history exemplifies our commitment to treating customers fairly and with the utmost transparency. We provide competitive and straight forward payroll funding for growth-oriented staffing companies.

Find out more information in our complete invoice factoring guide.

Accounts Receivable Financing Buyer’s Guide

If you are like most small business owners, securing financing often involves emotions ranging from uncertainty to frustration as you navigate the alternatives. In addition to your daily job responsibilities, the demands of evaluating borrowing options can be stressful and overwhelming. This straightforward buyer’s guide serves as a starting point to help you with the decision making process around choosing an accounts receivable financing partner.

What is Accounts Receivable Financing?

A/R financing allows a business to receive cash in advance of the payments due from its customers on open invoices. Rather than waiting 30, 60 or 90 days to be paid, the business can present open A/R to its financing partner and receive money within hours. By utilizing Accounts Receivable financing, businesses can accelerate their cash flow helping them make payroll, purchase new inventory, take on new contracts, and generally grow more sustainably.

Accounts Receivable financing is a term that is often used interchangeably with invoice discounting, factoring, and even asset based lending in some instances. With each lender using different terminology and different practices, selecting an A/R financing provider can be confusing. This guide will help you ask the right questions and select the best A/R financing solution for your business.

If you’re interested in learning more about the different types of lenders take a look at Exploring Your Options for Business Financing.

12 Questions to Ask an A/R Financing Partner

  1. How is my credit line established?

    Desired Answer: In A/R financing, your credit limit should be based on the credit strength of your customer and your business’s projected revenue.
    Red Flags: Traditional underwriting criteria like operating history, profitability, ratios, etc. don’t allow your business to benefit from the flexibility of A/R financing.

  2. Where do you get your funds?

    Desired Answer: The financier has a direct source of funds and lends those funds to you (banks or established financiers lending their funds to you).
    Red Flags: The financier borrows money making them a middleman. Whether they’re borrowing from a bank or private investors these costs are passed on to you. Even worse, the availability of these funds is not guaranteed.

  3. How quickly is my funding available?

    Desired Answer: A best in class A/R financing provider will ensure funds are in your account 12 – 24 hours after you’ve financed your receivables.
    Red Flags: Two to three days. If you’re funding with an independent financing company as opposed to a bank, these funds can take longer to clear. Don’t forget, any wire fees will be passed on to you, so ask about ACH fund transmission.

  4. How quickly are payments from my customers applied to my balance?

    Desired Answer: Immediately upon receipt.
    Red Flags: Any clearance days cost you time and money. Again, funding with a bank or with a provider that has a close relationship with a bank reduces holding periods and interest.

  5. What are all the fees associated with your financing?

    Desired Answer: Interest and/or discount fees only. The more straightforward the pricing structure, the more predictable the financing costs and cash flows.
    Red Flags: Any additional transaction fees, ACH fees, lockbox fees, service fees should be red flags. Origination fees and termination fees can sometimes be negotiated.

  6. What’s the term on your typical contract?

    Desired Answer: One year or less. If the financier requires a two-year commitment, keep looking.
    Red Flags: Two years or more. Flexibility is the name of the game. Don’t lock yourself in needlessly.

  7. How long has the financing company been in business?

    Desired Answer: While the length of time a financing company has been in business is not always a barometer for quality, it’s important to find a financier that has a proven and stable operating history.
    Red Flags: Start Ups. There are few barriers to entry for accounts receivable financing providers which unfortunately means a number of under-qualified partners. You don’t want your financing partner to go out of business and put you out of business in the process.

  8. What are your funding or lending limits?

    Desired Answer: Whether it’s one hundred thousand dollars or one hundred million dollars, all financing companies have a limit. If your company grows past that limit, there is likely a contingency plan, but at this point you simply want the financing company to be open and honest with you.
    Red Flags: “We don’t have a limit. We can do it all.” This is simply untrue. Everyone has a limit and you should push on sales people that try and state otherwise

  9. What are your funding limits for each company’s customer?

    Desired Answer: Similar to the answer above, you want your funding provider to outline how credit limits are established for your business’s clients.
    Red Flags: Ambiguity. Are they unclear? Is there no process in place? If so, ask to speak with their underwriter or the person making credit decisions.

  10. How will you interact with my customers?

    Desired Answer: In A/R financing relationships, there is interaction between the financier and the company’s customer at some level. Clarity, justification, and confidence in a funding provider’s process is crucial.
    Red Flags: Heavy handed responses and unclear responses are equally troublesome. If the financier is avoiding the question or claims there is no interaction, watch out. Similarly, good financiers understand it’s a partnership and not an adversarial relationship.

  11. Is any part of your operations outsourced to third parties?

    Desired Answer: No. Everything from sales, to credit, to accounts receivable management is in house.
    Red Flags: Yes. Some funding providers, may utilize lending “platforms” that are really a third party servicer (i.e. BusinessManager). Ideally, most companies prefer to work with full-service shops rather than those that may outsource crucial practices and processes.

  12. What reporting will I have access to?

    Desired Answer: Direct access to your account statements and open invoices via an online platform is a must.
    Red Flags: Reports are provided on demand and as needed. This leaves the financing party in a position of power and more often than not leaves customers in the dark.

Tips for Improving Customer Payment

For many companies Accounts Receivable collection can at best be described as a chore and at worst as an anxiety-inducing experience where one large delinquent customer can put their own business in jeopardy.

As a bank that offers factoring, or Accounts Receivable financing, The Southern Bank has a wealth of experience optimizing accounts receivable collection and in turn cash conversion for our customers. As such, we quizzed our Accounts Receivable collection team here to garner some advice in improving customer payment.

Develop the habit:

All too often, business owners ship product or provide the service and hope for the best. Like developing any other healthy habit, it’s necessary to block off time either every day or week to collection, so that it becomes second nature. Consistent, respectful, and friendly communication is key to ensuring a strong working relationship with your customer’s payable department.

Invoice accuracy

Check, double-check, and confirm invoice accuracy. Make sure payment terms, remit to addresses, and invoice destinations are correct. Maintain a system that ensures your invoice and payment doesn’t get lost. In A/R collection, time is truly money so don’t cause the delay with an invoice error.

Manage expectations and train your customers:

Be consistent with your customers. Calling haphazardly and collecting aggressively based on your own cash needs will only cause confusion and strain. Companies like to buy from suppliers that make them easy to buy from. By sticking to your contract and internal process, your customer will be better prepared and willing to remit payment on time and with less effort.

Smile and dial:

Not just a phrase for sales, collecting payment can at times be difficult no matter how solid your process. Your customers likely have other vendors, their own delinquent customers, and their own cash balance to work with – smiling, maintaining a positive attitude, and listening goes a long way in facilitating payment.

Don’t be blind

It’s easy to ignore and hope for the best when faced with delayed payments. While no one likes to face the likelihood of a write-off, the sooner you communicate concerns with a delinquent customer, the sooner you will resolve the issue. Don’t let a bad customer put you out of business, monitor all your customers’ payment behaviors and be prepared to respond to any negative trends.

If long payment cycles or Accounts Receivable collection remains a challenge for your business, you might be a good candidate for The Southern Bank’s Cash Flow Management program. Contact us today and we’ll fill you in on how we help businesses accelerate payment and improve their financial health.

Cash Flow Problems and Customer Payment

What do agencies, staffing companies, manufacturers, consultants and other industries all have in common? In addition to supplying products and services to Fortune 500 companies, they’re all subject to the same strain caused by one of the latest trends in corporate finance – longer payment terms. More often than not, cash flow problems and extended payment terms go hand and hand.

Healthy cash flow is the lifeblood of all businesses. Without adequate reserves of cash, owners stay awake at night thinking about debt coverage, meeting payroll, dwindling inventory levels, covering taxes, etc.

5 Causes of a Cash Crunch

1. Rapid Growth

On the surface, growth can hardly be viewed as a bad thing, but unanticipated or swift sales can potentially put a company out of business. More sales means more inventory, more people, and the need for more money. If your revenue is growing, but your working capital stays the same, that next big customer order you fill could leave you short on cash for your next supplier payment, tax bill, rent check, or loan payment.

2. Expanded Product Offerings

In addition to revenue growth, new projects and new products can require a substantial investment. Delays in launch, unsuccessful initial sales, and development related expenditures can devour a company’s cash balance. Diversifying your offering is a viable and often game-changing strategy, not having a cash safety net in place prior to doing so can be deadly.

3. Seasonality

Perhaps the most common cash crunch amongst customers, excessive seasonality can wreak havoc on a company’s balance sheet. Large cash needs followed by significant cash inflows followed by a quiet season can make planning difficult if not impossible to predict. Having a flexible financing and working capital solution in place can allow business owners to take advantage of seasonal sales rather than succumb to them.

4. Delayed Customer Payment

Customers extending their payment terms is quickly becoming the norm. As large multi-national businesses continue to stretch their suppliers, the smaller, regional suppliers of raw goods and services are now experiencing the ripple effect (read more about Longer Payment Trends here). Whether it’s a delinquent customer or a customer with buying power and long-terms, delayed customer payment can cause an enormous strain on your own cash conversion.

5. Unexpected Events

Abnormally large tax bills, law suits, customer bankruptcy, inventory obsolescence… there’s really no shortage of things that can simply go wrong. No matter how much preparation or cash reserves you have in place, there is always the potential for your cash position to be consumed by an unexpected event and for your business to go from healthy to distress.

Benefits of Improving Customer Payment

By collecting cash from customers faster and withholding payment to suppliers longer, large companies are able to increase their own cash positions and redeploy that money for their own benefit (increase dividends, initiate stock buybacks, invest in their supply chain, hire new employees, etc.). Essentially, powerful buyers are utilizing their suppliers as a free form of debt. For example, Proctor & Gamble has moved from 45 day terms to 75 day terms, GlaxoSmithKline is shifting from 60 to 90 day terms, and Mondelez International is extending terms all the way to 120 days.

The strain this inflicts on the supplier is undeniable. Once healthy businesses find themselves with cash flow problems and the inability to pay their own suppliers, take on new orders, pay their employees, and in many cases – keep their doors open.

What Can You Do to Improve Customer Payment?

The business owner that finds him or herself on the wrong end of a one-sided buyer/supplier relationship with little hope to negotiate has a few options. Some of which include:

  • Firing the customer. This of course assumes dropping the customer will not cripple the business’s growth or long-term viability.
  • Growing their own cash reserves. Perhaps the cheapest and most difficult way to solve cash flow problems is to reduce cash outflows. Whether it be cutting costs, delaying payments, or collecting other receivables faster, companies must make difficult decisions in order to conserve cash.
  • Asking their supplier if they offer supply chain finance. Many large buyers are offering to finance their supplier’s working capital through prearranged agreements with 3rd party banks. These rates are typically much lower than what the small business could secure on its own.
  • Consulting a bank. By partnering with a small business lender like The Southern Bank, companies can increase their working capital through a variety of products and services that prevent dangerous cash crunches while continuing to supply their large strategic customers.

If your business is faced with cash flow problems or you’re interested in increasing your cash reserves through bank financing, please contact us today.