Invoice factoring is a financial solution also referenced as accounts receivable financing. Businesses can convert up to 90 percent of their unpaid invoices into funding for their company. Go here to learn about accounts receivable financing.

The objective is to keep the business working capital strong to encourage growth while relieving the threat of collections. Still, the primary consideration is the potential for improved cash flow.

The financial solution is meant to be a short-term option for firms that invoice clients. Invoice factoring companies buy these outstanding invoices for which they pay a majority of the value upfront and assume the collection responsibility.

This means businesses receive their invoice payments sooner than the typical 90-day timeframe. The funds received from the invoice factoring can be used however they choose.

When the client pays the invoice factoring company the balance, the factoring company will take out interest and fees and charges and pay the company the money due.

What Is Invoice Factoring

Invoice factoring is a financial solution for companies that may not be eligible for a traditional business loan; they don’t meet the criteria. With invoice factoring, borrowers don’t need to follow a loan application, nor do they need to have good credit.

While it’s construed as a loan, this process is technically not considered a loan. When deciding whether the company will work with you as a business, the factoring company will review the client’s creditworthiness, not the business.

A percentage of the invoice value is instantly provided to the business while the client’s payment is collected directly from them. Here are the steps in the process.

• You perform a project for a customer, who will then be invoiced for the service.
• The invoice factoring company assesses the customer’s creditworthiness.
• If the customer’s credit passes the factoring company’s criteria, you will get an advance of roughly 90 percent of the invoice value.
• The customer will pay the debt directly to that agency then.
• Once the debt is paid, any fees and charges or interest you owe for the financing will be subtracted from the payment before receiving the remaining amount from the invoice.

It’s important to read the agreement carefully, including the fine print, to ensure no hidden fees or charges before committing to the financing. Here are some charges that you should expect.

• Interest: The interest with factoring can range between “0.5 and 4 percent.” It can either be a one-time charge or continue to accrue on a weekly or monthly timeframe with unpaid invoices.
• Late fee: If the customer delays payment beyond the due date, this fee will be incurred.
• Returned check: This fee will result if a customer’s check doesn’t clear.
• Wire transfer: This charge will be added if a client pays using a wire transfer.
• Origination fee: Some factoring companies will include this fee when initiating financing with their company.
• Termination fee: A termination fee is sometimes charged if a contract ends

What Are the Advantages and Disadvantages of Invoice Factoring

If you need funds for your business in a hurry, invoice factoring can be an ideal way to get the money fast without borrowing or financing a loan. The choice is not always the best solution for everyone.

If you have asked yourself “Is invoice factoring is a good idea?” for your particular circumstance, it’s important to research the solution, weigh the pros and cons, and compare different companies before making a final commitment.

Here are some basic advantages and downsides when using invoice factoring to resolve your financial issues.

• Fast funds: Typically, standard business loan approval can range from a few weeks to as long as months until the funds are dispersed. You have the choice of a “fast business loan” or can choose invoice factoring. Factoring takes only a few days, allowing up to as much as 90 percent of the invoice value.
• Credit score: If you have less-than-favorable credit, invoice factoring can be most suitable for your situation or for those who don’t want to involve their credit. Instead, the customer’s creditworthiness is assessed and will decide on approval.
• Cash flow: When you chase invoices, customers can delay payment, making it difficult to keep your firm’s bills timely. The company will take the burden of collections when using invoice factoring services. You will be fully aware of the cash you’ll have and when.
• Profit margin: You’ll be forfeiting the total balance on the invoice in favor of paying the agency interest and fees and charges for the services they provide.
• Hidden fees: You might incur fees you didn’t anticipate unless you thoroughly read the agreement, including the fine print. You want to avoid the possibility of lower profit margins.
• Client approval: The approval process doesn’t affect your credit, nor do you need to have good credit. In fact, the factoring agency bases its approval on the customer’s creditworthiness. You will only be able to take part if they meet the criteria.

How To Select an Invoice Factoring Company

When considering invoice factoring, it’s important to compare companies since no two are the same. These entities vary in their expertise, features, and size. In order to make an informed decision, you’ll need to consider whether the services offered align with your company’s needs.

It will be to your advantage if the company is familiar with your industry and the particular challenges that you face. When comparing, you’ll want to pay close attention to the interest rates to avoid the possibility of rates that are too high. That can mean lower profits and less capital.

Before committing to a company, read over the agreement thoroughly to calculate the fees and charges, including the fine print. Excessive fees can mean the company is too expensive, and you should keep looking for one with fewer costs.

In fact, depending on the capital you need, the ideal company will not only offer low interest and few fees but will provide a high advance rate with a fast turnaround on funding.