Chances are if you’re a business owner and you’ve found this article, you’re considering various financing options available to you, one of which may be invoice factoring.
Alternative financing options are becoming more prevalent with the expansion on online lenders, so you may be asking “what is invoice factoring” and “what is a factoring company?”. We’re here to answer those questions. Let’s start at the beginning:
What is Invoice Factoring?
Invoice factoring is the process of selling your accounts receivable to a third party (factoring company) for cash up front. The process if fairly straight forward – you receive 80-90% of the invoice value up front, then the factoring company returns the remainder to you once your customer pays their bill, minus a small factoring fee (1-5%). Because factoring is not a loan, it’s a sale of invoices, it does not impact your credit.
What is a Factoring Company?
A factoring company is a financing partner who helps businesses in need of faster cash flow. These businesses typically face timing challenges of slow-paying customers or need funds to ramp up growth. Factoring companies come in many varieties – independent financiers, financial institutions and multinational corporations to name a few.
Each factoring company has its own way of doing things, but they all share the common function of purchasing a business’s accounts receivable (AR). A business’s AR represents goods or services already produced and delivered to the buyer. The business has invoiced their customer which is why this type of financing is known as invoice factoring.
Why Wouldn’t I Wait for My Customers to Pay?
When you’re trying to grow your business, you often need steady, predictable cash to pay bills, make payroll or invest in other capital. This can be tough if you’re always waiting 30-90 days from when you send an invoice to collect from your customers. Cash flow then becomes unpredictable and often comes in after you need it most.
When you factor your invoices, you’re only waiting on the remaining 10-20% of the invoice amount – the rest is delivered up front. If you know when you’re going to bill your customers, you know exactly when you’ll get your cash. Factoring receivables allows you to let the factoring company wait on payment while you put the cash to work in the meantime.
Why Should I Factor with a Bank?
Banks are different than traditional or independent factoring companies. Unlike the latter, a bank is a direct source of funds, not a middleman. Find our more information about the difference here, or review the helpful infographic below.
How Factoring Works
A factoring company works with a business, as well as with the business’s customers (account debtors), to accelerate the movement of cash flow through the business. A detailed look at how factoring works shows the involvement of each party.
What are the advantages and disadvantages of factoring receivables?
There are many advantages of factoring. Here are a few, but you can find more information here.
- Faster access to cash flow
- No impact on your credit score (unlike traditional loans)
- Being able to grow your business without waiting on customers to pay
- Shorter approval process
At the same time, there are disadvantages to factoring:
- You sacrifice 1-5% of your invoice value in the factoring fee
- You risk the factoring company tarnishing your relationship with your customers
- Some factoring companies will charge hidden fees, making it far more expensive than expected
Find more information
At altLINE, we stand by 100% transparency. We’re a regulated bank that’s been in business since 1936 – we believe in helping our customers grow, and doing it in a trustworthy and honest manner. We want you to ask questions, carefully review your options and decide what’s best for your business. In the link below, you’ll find a Complete Guide to Invoice Factoring that will help provide you with all the details you need to make an informed decision. If you’re ready to speak with a sales representative, or simply get more information, please contact us at (205) 607-0811 or request a free quote.