Accounts receivable financing allows businesses to finance outstanding invoices
One of the most frustrating aspects of running a growing business is waiting for your invoices to be paid—especially when some customers don’t pay on time. And delayed payments mean you don’t get to funnel that capital back into your business right away, tying up your working capital and creating a whole host of trouble.
If you’re waiting on outstanding payments, you may want to consider invoice financing, which allows business owners to finance outstanding invoices. More specifically, invoice factoring — also referred to as invoice discounting — is a business financing method that helps companies raise cash using their outstanding invoices. Invoice discounting is especially beneficial and designed to help businesses that sell on credit.
Credit terms can be 30, 60, or even 90 days. However, the wait can disrupt a company’s ability to cover its day-to-day expenses. Not only that, but 93% of businesses experience late payments or unpaid invoices. This can affect a business’s ability to pay its vendors, buy supplies, or invest in profitable opportunities, so many businesses take advantage of invoice factoring to improve and manage their cash flows.
In this article, we’ll discuss what invoice factoring is, how it works, the application process, and how it can help your business.
Invoice factoring is a type of financing that provides a way for businesses to access cash to fund short-term needs without increasing their accounts payable. Instead, you sell your company’s unpaid customer invoices at a discount to a third-party factoring company.
The invoice factoring company will pay you the agreed amount for the invoices upfront. Then, they’ll collect payment directly from your customers. Any remaining amount is also paid to you (minus fees) once the invoice clears.
In an invoice factoring agreement, you’ll need to be clear on whether you’re entering a recourse or nonrecourse factor. This is important information because the type of factoring contract you agree on determines who’s responsible when an invoice goes unpaid. In a recourse factor, you’re responsible if a customer doesn’t pay.
You can buy back the invoice or replace it with a more current receivable. Make sure you read your contract and are clear on the conditions and terms of the recourse. First, the factoring company has to make a diligent effort to collect the invoice. Only then can they recourse the invoice to you after a set number of days you agree on, typically 60 to 90 days.
For instance, if you sell an invoice worth $10,000 and a customer doesn’t pay $2,500, you’ll need to repay the factoring company the same amount. Some lenders also provide options to help you cover the cost, such as withholding a portion of future cash advances or deducting cash from your reserve account if you have one. Most factoring contracts become a recourse factor because it’s less risky to lenders.
On the other hand, if the contract is a nonrecourse factor, you’re not obligated to buy back or replace any unpaid invoices. Any bad debts will be the lender’s risk. However, you might be charged a higher factoring fee for nonrecourse agreements.
There’s another type of invoice factoring service called spot factoring. It’s also referred to as single invoice factoring because businesses receive cash by selling one invoice to a lender. The process of spot factoring is the same as a regular factoring contract.
The factoring company will verify the invoice and advance the business a percentage of the value of the invoice. When the invoice comes due, the lender will collect the payment and pay the business the remaining balance minus factoring costs.
Spot factoring is typically suited to government contractors and companies with several big clients, and since factoring companies only have to deal with one customer, they may charge less in fees. So, a business opting for a single invoice factor may pay less in factoring costs.
However, if you’re looking for quick financing, don’t count on spot financing. First, not all lenders offer spot factoring. Second, if you find a spot factoring company, the verification process is usually slow. Businesses looking for a spot factor can expect approval to take over a week or longer.
Before entering into a contract, you should have a clear understanding of the terms and conditions. Here are the terms you may encounter in an invoice factoring agreement:
Factoring cost. Discount rates start from 0.5% to 5% of the value of the invoice. The rate you get also depends on the number of invoices, the types of invoices, and your customers’ creditworthiness. This is why lenders mainly offer invoice factoring to business-to-business (B2B) companies — so they can refer to your customers’ business credit scores.
Invoice factoring fee. Factor contracts vary, so make sure you’re clear about the lender’s fee structure and terms. For instance, some lenders may charge an additional fee of 2% to 3% for every 30 days the receivable is outstanding beyond the original 30 days. Some factors may prorate the fee daily, while others may charge on a month-to-month basis.
Application fees/closing fees. You also need to know if you’ll be charged application or closing fees. Some lenders charge application and due diligence fees, but most don’t. However, the fee varies for every financing company.
Monthly minimum and termination fees. Some factoring companies may require you to sign a long-term agreement to sell a certain amount of invoices each month. If you don’t meet the amount set, you’ll be charged a minimum monthly invoice fee. These contracts also involve a termination fee if you end the contract early. Termination fees are usually calculated as a percentage of your line of credit.
Every factoring contract is unique to every business and lender. At Clarify Capital, our dedicated advisers can walk you through every step of the factoring process to make sure you’re clear on the terms. Our goal is for you to get the money your business needs now and not wait on collecting payments.
Invoice factoring, also called accounts receivable factoring, is an invoice financing method. It allows you to borrow money from a factoring company using unpaid invoices as collateral. The lender will give you a lump sum of cash immediately. It then gets its money back when it collects from your customers.
For example, you make furniture and sell your merchandise to local stores. Typically, with these types of transactions, you agree to a credit term. This means the customers’ payments are due within 30 days, 60 days, or however long you agree from the date you deliver the furniture. Unfortunately, you have expenses that can’t wait until your customers pay. For instance, rent, utilities, and wages are expenses that come due whether your customers pay in full or on credit.
Here’s what happens when you use an invoice factoring company to borrow money with your accounts receivable as collateral. You’ll get an upfront payment depending on the percentage you and the lender agree on. Then, the lender collects the invoice payments from your customers as they come due. It then pays you the remaining balance minus any factoring fee.
For instance, let’s say your company has a $20,000 invoice, and you find a lender who agrees to a 90% cash advance rate of the invoice amount for a factoring fee of 3%. You’ll receive $18,000 immediately after your application is approved. When the invoices come due, the company collects from your customers. You’ll then get paid the remaining amount of $1,400.
Here’s a table to show you the computations for the amounts:
| Invoice value | $20,000 |
|---|---|
| Factoring fee ($20,000 x 3%) | $600 |
| Advance payment ($20,000 x 90%) | $18,000 |
| Remaining balance [2,000 - (20,000 x 3%)] | $1,400 |
| Total amount received | $19,400 |
At Clarify Capital, we believe everyone deserves a better financial future. This is why we’ve built a marketplace that keeps invoice financing costs low and opportunities high. Whether you need to buy new equipment, pay your employees on time, or handle emergencies, we can help you get the money you need now. Talk to a dedicated adviser about invoice factoring options today!
Whether from credit sales or customers not paying on time, cash flow issues can negatively impact your small business’s operations and growth. Fortunately, invoice factoring can be a powerful financial tool for your business to access cash to fill the gaps. It also allows your company to get paid faster for goods or services you’ve already delivered.
Below are some ways invoice factoring can help your small business.
Improperly managed or inconsistent cash flow can affect your company’s ability to grow. Your business might also be unable to rely on debt or equity financing to keep operations going. That’s where invoice factoring comes in.
It’s not technically a loan, so your payables don’t increase. However, it can help you access cash immediately. Invoice factoring also improves your cash flow because you can forecast when money comes in. You can then plan how to use it to keep your business operations going or take advantage of profitable opportunities.
Invoice factoring also helps reduce your business overhead because it takes the burden of debt management out of your hands. This is because the factoring company will do the work of collecting and chasing payments from your customers.
Lack of capital is a common reason small businesses fail. Running out of money to pay day-to-day operating expenses can sink a company fast. Not having enough working capital can also restrict a company’s growth and ability to take advantage of money-making opportunities. For instance, let’s say your business receives a large order or multiple orders but doesn’t have the supplies or the workforce to fulfill them. You’ll then lose those customers or opportunities.
Generally, there are two funding options for small business owners: borrow money or give up equity in exchange for financing with an interest rate. However, most term loans require excellent personal credit ratings and collateral that an entrepreneur may not have. Even if you qualify, you may not have the time to process the requirements and wait for approval. Invoice financing companies offer a financing solution for small companies looking for an alternative to equity financing or traditional bank loans.
Since invoice factoring applications don’t require a personal credit check or a lot of documentation, it provides a cheaper and easier way for companies to access cash and receive repayment for overdue invoices. Businesses can typically expect approval within one business day.
Most small business loans require an excellent personal credit rating or collateral. Although online lenders have faster processing times, they may request the same documentation and requirements. Invoice factoring provides financing access to businesses that might not be eligible for loans.
Some reasons a business can’t borrow include poor personal credit, limited time in the industry, or lack of collateral. With invoice factoring, creditworthiness is based on the credit rating of a company’s customers. So, a business owner isn’t required to show a personal credit score.
Since the accounts receivable serve as collateral, no additional collateral is needed to secure the financing.
Whether invoice factoring is worth it is an FAQ for most businesses. Yes, invoice factoring can be worth it, especially for businesses that sell on credit. Companies that offer credit lines to customers sometimes wait for 30, 60, or even 90 days to get paid for goods or services they’ve already delivered.
Selling on credit is a common way of doing business and an excellent marketing strategy to keep loyal customers. However, it can affect a company’s ability to meet its financial obligations.
Businesses have to pay their suppliers and employees and take care of other operating expenses. Unlike their customers, they can’t defer payment terms for these bills.
Invoice factoring can be a huge help for companies experiencing cash flow gaps. It’s a fast way for your business to raise money to cover day-to-day expenses, invest in marketing, or manage unexpected expenditures.
If there’s anything to be wary about invoice factoring, it might be that the responsibility of collecting the invoices falls to the factoring company. So, your customers would have to direct their payments to the lender instead of you. It may not make a difference for some, but it’s something to consider as it may affect your relationship with your customers.
Invoice factoring benefits businesses looking to raise capital without borrowing or giving away equity. It also offers access to funding for new business owners with limited operating history or who have bad credit. Invoice factoring is also an excellent small business financing option for companies that may not be eligible for small business loans.
As mentioned, it’s especially beneficial to businesses that sell on credit. These companies can have cash on hand through invoice factoring instead of waiting for their customers to pay. Transport companies, staffing agencies, wholesalers, and government contractors are examples of businesses that use invoice factoring to manage their cash flows.
Staffing service providers usually pay their workers — their biggest resource — every week. But, of course, there’s a gap between when staffing agencies invoice their customers, which are other companies, and when they receive payment. Some staffing agencies routinely use invoice factoring to have consistent cash flow. This allows them to recruit and pay their top talent and provide great service.
Transport companies are also regular users of invoice factoring due to the nature of their business. They have to deliver merchandise to recipients before they get paid. To do the job, they have upfront costs, such as fuel, insurance, wages, and tolls. Being able to raise money quickly through invoice factoring helps cover their maintenance costs.
Another type of business that benefits from invoice factoring is wholesalers. They purchase goods from manufacturers in bulk at a discount and then sell them to retailers for a profit. Since they also sell on credit, they use invoice factoring to get paid faster instead of waiting for their customers to settle their accounts.
At Clarify Capital, we work to find the best financing option based on your business goals. You’ll have the guidance of a dedicated adviser to help you throughout the approval process and achieve success every step of the way. You make all the decisions and are in full control of your application.
If you’re looking for a quick and easy way to raise cash for your business, we offer invoice factoring. We value transparency, which is critical to every invoice factoring contract. Your Clarify adviser will make understanding your factor terms simple and clear.
To qualify for invoice factoring, you need three months of invoicing history and an annual income of $300,000. Since approval is partly based on your customers’ creditworthiness, invoice factoring is only offered to B2B businesses.
If you meet all the requirements, apply online and get the money in your bank account within 24 hours, or call us directly at (877) 838-3919. There’s no fee or obligation to apply, and it takes less than two minutes!
"My company gets paid by the state and it takes 60-90 days to get paid. I worked with both Michael and Bryan. We were able to leverage my accounts receivable to secure the working capital needed for day-to-day operations. I’m able to pay off the credit line with no prepayment penalties. Their line of credit program was exactly what I needed."
Get approved today and have money in your account within as little as 24 hours. No obligation — prequalify without affecting your credit!