Waiting to get paid by your clients and customers can be one of the most stressful frustrations that comes with owning a business. That is especially true if you have to wait a month or more in order for that payment to arrive.
Long delays in payment can lead to major deficiencies in the cash flow of your business which can cause you to fall seriously behind in crucial expenses such as your payroll, your inventory, or your rent. Of course, this can reduce your business from growing when it should be seriously flourishing.
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That’s where invoice factoring with businesses such as ezinvoicefactoring.com comes in. Invoice factoring is a form of financing that allows small and medium-sized businesses to get valuable cash advances based on the value of their accounts receivables. So, instead of having to wait for weeks or months to get the money that is owed to you, you can get paid much quicker so that you can maintain your business flow as usual with the money that is owed to you.
If you are interested in figuring out how to choose the right company to work with when it comes to invoice factoring, we have broken down the major facts about invoice factoring that you will want to know.
What exactly is invoice factoring?
Certainly, the first thing that you will want to know about invoice factoring is exactly what it is and how it can help your business flourish.
Essentially, invoice factoring is a basic financial agreement and transaction in which a business (that’s you) sells its account receivables (that’s your invoices) at a discounted price to a financing company that is known as a factoring or factor company.
Factoring companies will typically advance somewhere between 70 and 90 percent of your total invoice upfront. The remaining percentage that is left over is then remitted when the invoice is paid in full, minus the fee that you pay in order to take out the factor in the first place.
If you are curious about learning more about invoice factoring, keep in mind that it is often also referred to as account receivable factoring.
How does invoice factoring work?
The very first step of invoice factoring begins when you decide which factoring company you want to work with. There is a certain amount of research that you will of course want to do to make sure that the factoring company you end up working with has loads of experience in the industry, tons of great reviews and of course good rates when it comes to how much you have to pay in order to get the funding you need.
From there, you can start selling your outstanding invoices for working capital that you can use to help grow your business. Keep in mind that when a factoring company verifies your invoices, the factor will pay you somewhere between 70 to 90 percent of the total value of your invoice. The rest will come once the invoice itself has been paid in full.
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Overall, there are typically three different groups that play a role in every invoice factoring agreement. The first is your business, otherwise known as the invoice issuer. The second is your customers, those who owe money on their invoices. The third is the factoring company, the company that supplies the cash and then sets out to complete your invoices.
Major steps of invoice factoring
Just like every other important financial transaction, it is heavily important that you know the ins and outs of every step of invoice factoring. We’ve broken down those steps for you so that you can feel confident about knowing the basic information related to invoice factoring.
In all, there are six major steps of invoice factoring. They are as follows:
- After your company delivers the product or service that you provide to your customers, you issue an invoice with the net terms included
- The company then “sells” that invoice to the factoring company
- What your business gets back is an advance payment based on the value of those invoices and typically equaling somewhere between 70 and 90 percent of the total value of those invoices
- Now that you have that cash in hand, you can use it pay bills, your employees, restock your inventory, grow your business, whatever you want
- From there, the customer will then pay their outstanding invoice and your business will receive a “rebate” for the remainder of the funds that you are owed, minus a fee that you will owe the invoice factoring company based on the term of your contract and the value of the invoice
- Ultimately, all three parties involved are able to benefit from the agreement. The customer gets cash up front, their customer gets favorable and workable payment terms and the factoring company collects the fee.
Now that you know the basic steps of invoice factoring, you might be getting a better idea of whether or not this kind of operation would be right for your company. If you are still unsure about the value invoice factoring could add to your business, read on to learn about the major advantages and disadvantages of invoice factoring!
Advantages and disadvantages of invoice factoring
One of the very best ways to figure out whether or not a certain financial agreement is right for you and your business is to learn about the pros and cons of that agreement. For that reason, we have broken down the primary pros and cons, or advantages and disadvantages of invoice factoring.
There are three primary advantages of invoice factoring. Those include:
- You get quick and easy access to working capital
- You are able to offer longer and more flexible net terms to your clients without worrying about a stoppage in cash flow
- You receive higher credit limits based on the creditworthiness of your clients, not just your business income and FICO score
Just like there are some great advantages that you should be aware of, there are also some disadvantages that you owe it to yourself to learn about as well. Those include:
- Not available to B2C companies or companies that do not have notable or larger clients
- More expensive than traditional bank financing
- There is potential liability for overdue invoices that are not paid by your clients
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What about terms and rates
Another thing that you will definitely want to learn about as you continue to figure out whether or not invoice factoring is right for you is information regarding the terms and rates of a related agreement. The fee rate structures for factoring companies range and are either variable or flay. Typically, the more invoice that you factor the lower your rate is going to be.
When it comes to financing agreements that come with variable fee structure, factors are going to discount a small percentage of the invoice for as long as the invoice is outstanding. This means that the longer your invoice goes unpaid, the more fees you are going to accrue overtime. While this type of fee structure is more difficult to calculate, they can be more cost effective. That is especially true if your clients end up fulfilling their invoices in a short amount of time.
Of course the flip side of this is that if they take a long time, you could end up paying more.
When it comes to a flat rate structure, the rate will remain the same no matter how overdue the invoice becomes. However, flat rates are typically higher than variable rates. This is a preferred rate for you and your business if you have a belief that the clients and customers who owe you and have yet to fulfill their invoices may take a long time to do so.
Finally, when it comes to terms and rates, they are determined by a number of different factors which include the following:
- Business industry
- Volume of invoices
- Net terms of the invoice
- Types of service
- Quality of clients
Who works with invoice factoring
Finally, you may be interested in learning about what types of companies tend to work with invoice factoring companies. This could certainly help you get a better idea if the agreement is a good fit for you and your business! Businesses in the following industries tend to be heavy users of invoice factoring:
- Staffing services
- Commercial services
- Oil and Gas servicing
- IT Services
Now that you have a pretty good idea over what it means to work with an invoice factoring company, chances are good you now have a pretty good idea about whether or not it could be a great fit for your company. Overall, invoice factoring is a great way to make sure that you are not dependent on your clients paying their invoices in order to make sure that your business is operating smoothly and growing consistently. That way, you reach your business goals in no time!