Invoice Factoring:
What is it?
Invoice Factoring is a financing solution that helps businesses improve cash flow by selling their outstanding invoices to a factoring company at a discount. Instead of waiting 30, 60, or 90 days for customers to pay, businesses can get immediate cash by factoring their invoices. This allows them to meet short-term financial needs, cover operational expenses, or invest in growth opportunities without taking on debt.
Here’s how it works: The business sells its unpaid invoices to a factoring company, which typically advances 70% to 90% of the invoice value upfront. The factoring company then collects payment directly from the business’s customers. Once the customer pays the invoice, the factoring company releases the remaining balance to the business, minus a fee for the service.
Invoice Factoring is particularly useful for businesses that have long payment terms with their customers or experience seasonal cash flow fluctuations. It’s commonly used in industries like manufacturing, trucking, staffing, and business services.
How do I get it?
To qualify for Invoice Factoring, businesses need to meet several requirements. Here are the key ones:
B2B Sales: Invoice factoring is generally available to businesses that sell products or services to other businesses (B2B) or government entities. Invoices should be for completed work or delivered goods.
Creditworthy Customers: The factoring company’s primary concern is the creditworthiness of the customers who owe the invoices. Strong, reliable customers increase the likelihood of approval and better terms.
Unpaid Invoices: The business must have outstanding invoices that are due within 30 to 90 days. The factoring company will typically not factor invoices that are already overdue.
Minimum Volume: Some factoring companies have a minimum invoice or monthly volume requirement. This can vary depending on the industry and the specific factoring company.
Business Financials: While invoice factoring is more about the creditworthiness of your customers, some factoring companies may still review your business’s financial health and operational history.
No Existing Liens: The invoices must be free of any existing liens, meaning they cannot be pledged as collateral for another loan. The factoring company will typically require that they have first rights to the receivables.
Interest Rates and Fees:
Invoice Factoring fees typically range from 1% to 5% of the invoice value per month, depending on factors such as the creditworthiness of your customers, the industry, and the volume of invoices factored. The fees are usually deducted from the remaining balance once the invoice is paid by the customer.
Questions:
Most factoring companies advance 70% to 90% of the invoice value upfront, with the remainder released after the invoice is paid, minus the factoring fee.