If your company has experienced cash flow issues, you may have thought about using different types of alternative finance. Nevertheless, invoice factoring is a special service that differs significantly from other forms of cash flow financing. Here are a few of the often asked questions concerning factoring companies.
A factoring business specializes in invoice factoring or buying unpaid bills from companies with slow-paying clients who want to increase cash flow. Instead of waiting 30 to 90 days for a consumer to pay, a business can access cash flow instantly after submitting an invoice.
After buying a company’s invoices, they start taking payments directly from the company’s clients. These are also called invoice funding companies.
Not all factoring businesses are the same. In actuality, many concentrates on particular businesses, such as staffing, construction, or trucking. Although some banks provide factoring services, independent providers make up the vast majority of the industry.
When a company factors its invoices, the factor (or factoring company) gives the company an advance of up to 90% of the invoice value. The factor will give the business the remaining 10% after receiving the complete payment from the end consumer, less a factoring fee.
Depending on a number of variables, including the age of the invoice, that cost normally ranges between 1 and 5 percent. Factoring is the purchase of assets, not a loan (i.e. your invoices).
There are various ways that factoring is practiced by invoice funding companies. There are the so-called transportation factoring, and small business invoice factoring, and even freight capital factoring.
Economies of scale are a factor for factoring companies, just like they are for most businesses. Since many of the expenses involved in starting and keeping a factoring connection are fixed in nature, a factoring client’s charges will decrease as they use the line more frequently.
Longer payment durations result in higher fees from factoring providers (i.e. 60-90 days). This is so they can advance your company cash over a longer length of time, which is valuable to the factor.
The invoices you are factoring in will be paid by your clients. The factoring firm will therefore want to make sure that your consumers are worth their money. Lower factoring fees will be the outcome of better credit and vice versa.
Avoid invoice funding companies if you don’t feel confident working with it. Are they sneaking extra costs (such as unused line fees, renewal fees, and monthly minimums) into your factoring contract? Do you worry that they won’t properly represent your company when pursuing unpaid debts from your clients? Do they frequently receive unfavorable online reviews? When selling your receivables, you should steer clear of companies like these.
These are some of the basic things you need to know about factoring.