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 over 30% of small businesses experience or expect to 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 flow.
In this article, we’ll discuss what invoice factoring is, how it works, 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 to have 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 either buy back the invoice or replace it with a more current receivable. Make sure you read your contract and be 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, which is typically 60 to 90 days.
For instance, if you sell an invoice worth $10,000 and a customer doesn’t pay $2,500 of it, you would 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 end up being 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 also 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 then collect the payment and pay the business the remaining balance minus factoring costs.
Spot factoring is typically suited to government contractors and companies that have 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 can end up paying 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 do 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 you enter into any contract, you should have a clear understanding of the terms and conditions. Here are terms you may encounter in an invoice factoring agreement:
Every factoring contract is unique to every business and lender. At Clarify Capital, our dedicated advisors can walk you through every step of the factoring process to make sure you’re clear on the terms. Our goal is to get the money your business needs now and not to wait on customer payments.
Invoice factoring, also called accounts receivable factoring, is an invoice financing method. It allows you to borrow money from a factoring company by 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, let’s say you make furniture, and you sell your merchandise to local stores. Typically, with these types of transactions, you agree to a credit term. This means the customer’s payment is due within 30 days, 60 days, or however long you agree on from the date you deliver the furniture. Unfortunately, as a business, you have expenses to cover 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 will 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:
|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 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 advisor about invoice factoring options today!
Whether it’s from credit sales or customers not paying on time, cash flow gaps 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 offers a way for 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 not be able 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 be doing the work of collecting and chasing payments from your customers.
Lack of capital is one of the common reasons a small business fails. It’s because 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 ways for small business owners to obtain funding: to borrow money or give up equity in exchange for financing. However, most loans require excellent personal credit ratings and collateral that a business owner may not have. Even if you qualify, though, you may not have the time to process requirements and wait for approval. Invoice factoring offers 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. 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 ask for the same documentation and requirements. Invoice factoring provides financing access to businesses that might not be eligible to obtain 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 receivables themselves serve as collateral, no additional collateral is needed to secure the financing.
Yes, invoice factoring can be worth it, especially for businesses that sell on credit. Companies that offer credit terms 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 does 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 payments 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 for a way to raise capital without borrowing or giving away equity. It also offers access to funding for new business owners with a limited operating history and to owners who have bad credit. Invoice factoring is an excellent option for companies that may not be eligible for small business loans, as well.
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 utilize invoice factoring to manage their cash flows.
Staffing service providers usually pay their workers — their biggest resource — every week. But, of course, there is 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 talents and provide great service.
Transport companies are regular users of invoice factoring, as well. This is because of the nature of their business. They have to deliver the merchandise to the 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 are 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 with you to find the best financing option based on your business goals. You’ll have the guidance of a dedicated advisor to help you throughout the process and achieve success every step of the way. You make all of the decisions, and you 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, and it’s also critical to every invoice factoring contract. Your Clarify advisor will be there to 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 based in part on your customers’ creditworthiness, invoice factoring is offered to B2B businesses only.
If you meet all of 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."