Researching financing options for your company can be challenging because there are many funding types, and not all of them will be useful for your business. Each financing type will have a unique set of concerns you must consider. Those concerns include understanding the process, determining whether your business will benefit, and choosing which invoices to use for invoice and accounts receivable factoring or financing.
What Is Factoring?
Invoice factoring, invoice financing, or accounts receivable financing can be used interchangeably in most cases and are ways for companies to get paid now for work that has already been done instead of waiting for customers to deliver on the invoice you send them. In other words, you use your accounts receivable as collateral to secure an advance. Some of the best invoice factoring companies will have experience working with various industries and be able to help you find the proper terms for your invoices and needs.
Which Companies Can Use It?
It is crucial to remember that not all companies can use factoring because they do not operate with invoices, have payment periods longer than ninety days, or do not have enough invoices for the amount of financing needed. Some factoring companies will have stricter requirements, like setting a specific length of time you will need to have been in business, but most will check the creditworthiness of your customers.
How Much Do You Need?
Invoice factoring can be used for anywhere from fifty-thousand dollars to fifty million, depending on the factoring company you work with, the invoices you choose and the amount you need. Knowing how much you need to borrow before applying for an advance or other type of financing is critical in paying your bills now while still being able to repay the debt in the future. Most experts advise you to take as small an advance as you can while choosing the most reliable customer accounts to factor.
How Long Is the Repayment Term?
Some factoring companies will have a term-length contract of thirty days and a year, while others will take on the invoice repayment process themselves. When the factor takes on the invoices, instead of leaving them in your possession, you will have the fees charged for the advance taken out of the total value of the invoices you use before the funds are advanced to you. When you retain ownership of the accounts, you must repay the advance plus the fees.
How Fast Is It?
One of the biggest reasons companies use factoring for funding needs is the speed of approval and funding disbursement. In most cases, the factoring company will only need to verify your invoices and the creditworthiness of your customers before disbursing the funds to your accounts. This means you can have your advance in hours or days instead of the weeks and months it can take to be approved for a bank loan. Most of the time, you can fill out an application online, upload necessary documentation and get approval, all without leaving your office.
What Are the Costs?
Since it is relatively easy and quick to be approved for factoring, invoice financing and accounts receivable financing, these funding methods tend to be some of the most expensive in terms of fees and interest. Remember that you will usually have to use invoices with a total value of more than what you need because the factoring company will hold a portion in reserve until the client pays on the invoice, and fees can be deducted. You can also see costs like wire transfers, returned checks, late payments and interest. These costs will be outlined in general terms in the contract and should be considered before signing.
Before you apply for this financing option, you will want to understand what the process involves, what types of fees to look for, and what the usual repayment terms are. Factoring your accounts receivables or invoices is an excellent way to get paid now for work you have completed while still giving your clients time to pay the bill. It is crucial to remember that this funding option is not ideal for every company and cannot be used by those who do not deal in invoices.