Do you use invoices in your business? Are you experiencing cash flow problems because of unpaid invoices in your business? If this is you, then you might consider invoice financing. This funding option, also known as “invoice financing” or “accounts receivable finance,” allows business owners to access the funds they need from customers who have not paid their invoices.
Factoring companies can help you get an advance on your invoices. This will allow your company to continue running smoothly. This is one of many resources that small businesses and large companies can use to find the right funding.
What is Invoice Factoring?
Factoring invoices allows businesses to use outstanding invoices as collateral. Unpaid invoices can be traded for a loan to provide working capital. Invoice factoring is a great option if you have difficulty finding financing from traditional banks and your business relies on customer invoices.
There are fees associated with invoice financing and factoring. Invoice factoring agreements will typically include processing fees and factoring charges. The contract will detail any additional finance fees. Invoice factoring is a way for companies to raise money for their taxes, payroll, upcoming projects, and other expenses.
You can quickly get cash for approximately 85% of your total statement amount. The invoice factoring company holds the remaining 15% in reserve. The invoice factoring company will return a portion of the amount, while the remainder is subject to the above fees. The fees charged vary depending on the time it takes to calculate them.
Why choose Invoice Factoring
Two main reasons businesses choose invoice factoring to fund their business are:
- To keep your operation running smoothly, you need quick cash.
- You are unable to obtain financing from traditional institutions such as banks or other lenders.
Invoice factoring is a solution for many of these situations. Your business can continue to run smoothly by trading invoices for working capital. Businesses that deal with constant invoicing know how difficult it is to wait for customers to pay to get the financing they need. These payments are essential for day-to-day operations. If the invoices pile keeps growing, it is likely that your company isn’t getting the funds they need.
Sometimes, traditional financing is not available to companies. Invoice factoring is a great option if this is the case. Your business will not be able to receive credit scores inquiries or other qualification pressures from the company that has outstanding invoices. Invoice factoring is a good option for businesses with limited credit and poor track records.
Other Reasons to Consider Invoice Factoring:
- It’s fast and simple
- It helps to build credit for businesses
- Management receivables reports in detail
- Factors or invoice financing companies can leverage the expertise of a factor.
- There is no debt to repay
- Increase your purchasing power
- Eligible for small businesses
- Conserve your equity
- Unlimited capital access
- Helps to build business credit
- Accessible to almost every industry
What is Invoice Factoring?
Let’s first look at the cost of invoice factoring. To determine if invoice factoring is worth it for your business, you need to learn more. You can make the right decision for your company if you are well-informed about invoice factoring. Factoring could be your solution to getting the cash that you need.
Let’s look at the process of invoice factoring:
Step 1 – Invoices are Issued to Clients
The invoice is the first thing to do. An invoice is a statement that is used to bill customers or clients based on an order. It tells them how much they owe and when payment is due. These are known as the “net terms”. It is important to note the invoice’s value when selling it to a finance company. The invoice’s value will determine how much you can sell it.
Step 2 – Submit invoices to the Factoring Company
Next, send the invoice to the invoice factoring firm for review and processing. This is all according to the terms of the invoice-factoring agreement. This is usually done via an online management portal or by a designated email.
Factoring costs will vary depending on the terms of agreement, including any advance rate, discount rate or minimum monthly payment. The advance rate refers to the percentage of collateral’s value that a lender will lend as a loan. The invoice value will affect the cost. When they sign this agreement, customers will be able to see what fees they can expect and how much they’ll have to pay.
Step 3 – Obtaining the Advance Payment
Factoring companies will verify and process the invoices before releasing the advance payment. This lump sum can be 80 to 90% depending on the agreement. This cash is an advance payment that you receive as the invoice owner.
The Automated Clearing House (ACH), direct deposits these advance payments to the business owner’s account. Invoice factoring companies may be able send the money by wire transfer if you require the money in a shorter time frame than two days.
Step 4 – Collecting the invoice from the client
Invoice factoring companies then collect any outstanding invoices. All invoices must be paid within a specified time period. However, the client must pay the factoring company at some point based on the net terms that the factor agreed to before the process began. The factoring company will receive the money once the client has paid all of the statements.
The online portal allows the business owner to view a schedule and account details, as well as the responsibility for all invoices that are being advanced. For smaller factors, you might email the “daily calendar of accounts”, which lists the invoices that the business owner has sold, their amounts and due dates.
5: The Business Owner Recieves the Rest of the Funds from the Invoice
After the invoice is paid in full, the business owner receives the remaining invoice proceeds less any invoice factoring fees.
How to Reduce the Cost of Invoice Factoring
Let’s now talk about the cost of invoice factoring. Businesses must make the right decisions for their business. Unfavorable financing options or ones that are not right for your company could cause financial problems down the road. These crucial decisions can be made easier by knowing exactly how much invoice factoring costs.
Let’s say you have a $10,000 invoice with 30-day terms. This will help you understand the different types of financing. This example shows how it would work. Continue reading to learn more.
- Zena Financial will pay 90% of the invoice amount (equal to $9,000) and hold the remainder, $1,000, as a reserve.
- After the invoice has been paid, clients pay a finance fee equal to 3% ($300) to the factoring company.
- Factoring fees are charged, which in this case is 1% per semaine, for two weeks.
- The $200 2% factoring fee is due after the two-week period has expired. The factoring fee is always disclosed at the beginning of any contract process.
- We pay back the $1,000 amount that was in reserve to the customer.
- For immediate payment of $9,000, you have already paid $500 on your $10,000 invoice.
- *This is just an example. Numbers and fees will vary.
Invoice factoring is an economical way to quickly get the funds you require, as you can see in this example. This type of financing is also free from hidden fees. It all depends on how your business works and the value of the invoices that you want to sell. Invoice factoring is a solution to cash flow problems.
Industries that can use invoice factoring
Invoice factoring is used by many industries. This type of financing is available to any company that has outstanding invoices or accounts receivable. Zena Financial has worked with many industries including:
- Auto repair shops
- Agritourism and farming
- Non-profit organizations
- Restaurants, bars and food trucks
- Transport and trucking
This great financing option is available to both small and large businesses.