Last Updated on November 20, 2023
Whether you are an individual realtor or a real estate agency, your cash flow is bound to be unpredictable because there may be gaps between property closings. Unfortunately, business expenses have no such gaps, meaning your income may be strained and lead you into a cycle of negative cash flow and mounting debt.
To keep growing your real estate agency and stay competitive in the market, you need cash to pay business expenses, meet payroll obligations, and repay debt, which is where realtor invoice factoring comes in.
In this article, we discuss how real estate factoring works, its benefits, and how it compares to other financing alternatives. Read on to learn how factoring services can help your business!
What Is Real Estate Factoring?
Real estate factoring occurs when a real estate agency sells commission invoices to a third-party company, also known as a “factor”, in exchange for an immediate cash advance. Realtors often obtain commissions via invoices, meaning there may be delays in receiving payment that can lead to cash flow problems. Realtor factoring is used to boost cash flow and unlock working capital, eliminating your reliance on customer payment timelines.
Benefits Of Invoice Factoring for Real Estate Commissions
Real estate factoring is a great way to unlock funds and increase working capital when your commissions are delayed. Check out how real estate broker commission factoring can help you access cash when needed:
Get Your Accounts Receivable Invoices Paid in Days, Not Months
The best real estate factoring companies provide cash advances within 1 or 2 days. This means you can receive up to 90% of your commission almost immediately instead of in 30, 60, or even 90 days.
Access Capital To Grow Your Business While Maintaining Equity
Many realtors sacrifice equity to fuel their agency’s growth, but commission factoring can set them up for long-term success. Real estate factoring provides cash advances, so you do not have to sell equity or assets to pursue growth initiatives.
Get Cash When You Need It Most
Late commission payments hurt your business because they create an inconsistent cash flow, leaving you without enough money when you need it. Real estate factoring accelerates payments to ensure consistent cash flow and protect your financial health.
How Does Real Estate Factoring Work?
Realtor factoring can be summed up by the following step-by-step process:
- A real estate agency sells outstanding accounts receivable to a factoring company while awaiting customer payment in an effort to improve cash flow.
- The factoring company advances the agency 80-90% of the value of each invoice that has been factored.
- The real estate agency’s customers forward payment to the factoring company.
- The factoring company releases the remaining, unpaid value of each invoice to the real estate agency, minus a small factoring fee.
Uses For Your Factoring Cash Advance
Receiving cash advances from real estate factoring means you do not have to wait on customer payments to grow your business. Instead, you can avoid long payment cycles and gain growth capital sooner to accelerate business development.
Here are some ways you can use invoice factoring cash advances:
Real estate agents are the lifeblood of your realtor business, and punctual payroll is essential to keep them happy. Unfortunately, late commission payments can cause you to miss payroll obligations. Invoice factoring cash advances gives you the money you need to pay them on time, improving employee productivity, morale, and satisfaction.
Take On New Jobs
Real estate companies need a variety of software and equipment to operate well. Some realtors even have forklifts and trucks on standby, so they do not have to rely on third-party moving companies.
You should not be forced to wait for commission payments to clear to purchase any of these tools and software. Fortunately, invoice factoring cash advances helps you buy the equipment you need to run your company without sacrificing business assets or equity.
Pay Operating Expenses
Real estate agents must pay for advertising, transportation, licensing, and other costs. Real estate factoring gives you the cash to pay these obligations without waiting for customer payments or selling equity.
Real Estate Businesses That Can Benefit from Factoring
Invoice factoring is available for real estate businesses of all types. Here are some example businesses that may benefit from factoring:
- Real estate agencies
- Real estate photographers
- Real estate marketers
- Real estate appraisers
- Property flippers
- Commercial property managers
Real Estate Commission Factoring vs Other Funding Options
In addition to real estate commission factoring, there are a few other options to fund your business. Are any of them better than real estate commission factoring? Here are three alternatives to invoice factoring for real estate investing:
Real Estate Commission Factoring vs Bank Line of Credit
Many realtors choose a bank line of credit to fund their business. While they may qualify for one, a bank line of credit may not provide enough funds to grow their business.
Banks typically approve your line of credit and set the lending limit by looking at your fixed asset portfolio. However, most real estate businesses do not have a lot of fixed assets. If you do not have many assets to collateralize, the bank may give you a lower lending limit and make qualifying harder.
Real estate commission factoring is usually better if you do not have many fixed assets because financing companies look at customer invoices to provide funding. If you work with an established customer base, factoring companies will give you enough working capital when banks cannot.
Real Estate Commission Factoring vs ACH/MCA Loans
ACH (automated clearing house) and MCA (merchant cash advance) loans only require bank statements to qualify and provide funding within one or two business days.
Despite their speed and ease of qualification, ACH and MCA loans have high interest and lender fees that can reach 60% of your original loan. If you mismanage these loans, the mounting debt can put your company in lots of financial trouble.
Real estate commission factoring is usually safer for your finances because customers will eventually pay your commissions, repaying your cash advance. Because it is not your job to come up with payments, you can focus on developing your company instead of stressing over debt repayment.
Real Estate Commission Factoring vs Quick Pay Discounts
You can improve cash flow by successfully offering discounted rates to customers who pay their commissions early. However, this method heavily depends on your customers’ priorities.
Some people prioritize having more cash on hand over cost savings, so they may ignore your offer and pay their commission as scheduled, leaving you low on cash and unable to grow your business.
Real estate commission factoring is usually more reliable because you are guaranteed to receive a cash advance as long as your invoices are approved.
Typical Real Estate Factoring Rates and Fees
Commission factoring fees depend on how much you plan to factor and how long customers take to pay. Factoring more amounts and getting customers to pay their commissions faster will give you lower rates. Criteria examined will also include your company’s age, customer base diversity, and overall customer credit quality.
Factoring fees are often broken down into two elements:
- Initial fee: This fee covers our processing expenses for an initial set period of time (typically the first 30 days) and costs 0.90-3.50% of your invoice’s face value.
- Incremental fees: These fees cover cash advance expenses after the initial fee period and cost 0.25-1.50% of your invoice’s face value per charge.
Requirements to Apply for Realtor Commission Factoring
What documents do you need to be eligible for invoice factoring? Here is what most factors will require to have prepared before signing a factoring agreement:
List of Existing and Potential Customers
You’ll need to submit a list of all existing and potential real estate customers to review their credit quality and determine factoring eligibility.
As part of the factoring application, the following documents will typically be required:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Customer contracts
- Articles of incorporation and other relevant corporate documents
Accounts Receivable Aging Report
Accounts receivable aging reports categorize your invoices based on due dates. Factoring companies need this report to examine their payment habits and determine whether or not they are eligible for factoring.
Frequently Asked Questions About Our Factoring Services
Here are some common questions about real estate factoring answered.
Does altLINE offer real estate invoice factoring?
No, altLINE does not offer real estate invoice factoring. However, altLINE does offer factoring services for a plethora of other industries.
Do you need to run a credit check before getting started with factoring?
altLINE runs a credit and background check on all business owners utilizing our services. However, there are no minimum credit thresholds for approval. Background checks are reviewed for financial-related crimes or felonies. In the event a borrower has a spotty background, approval with altLINE may be in question, but in the event the borrower is disqualified, altLINE will often connect the borrower to a realtor commission factor that is willing to help.
Are UCC filings required when factoring realtor commission invoices?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (i.e. the invoices) it plans to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Is realtor commission factoring a debt or loan?
Realtor commission factoring is neither debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.