What is Account Receivables Invoice Factoring?
Account receivable invoice factoring is a method of business financing where you will get financing against the amounts owed by customers. Usually, the company will receive an amount that is almost equal to the outstanding debts owed by customers. However, the amount also depends on the age of the invoice. Factoring companies consider certain things when determining how much to offer a company for its account receivables. One of these important elements is the size of the company. They feel that big companies are likely to pay back faster than small companies. In the same way, new invoices are more valuable to old ones since there is a higher possibility of the customer paying back the invoice. Factoring companies usually finance 70% to 90% of the value of the outstanding invoices.
How to Work Well with Invoice Factoring Companies
Factoring companies are usually wary of fraud. They are careful when dealing with companies that need invoice financing since it is risky. If you want to keep getting access to invoice financing, it is important to maintain a healthy relationship with the invoice factoring company. You should also try as much as possible to avoid penalties from the factoring companies. You can do these things to ensure that the invoice financing company continues to work with you.
- Do not factor invoice from bad customers
There are certain customers that do not pay on time. Once you have worked with them for up to three months, you will know that they are not reliable. If you are factoring invoices, you should not seek for financing for the invoices you will get from the customer. If the customer does not pay on time, you will ruin the relationship you have with the factoring company. You may also end up paying extra fees for late payments. If possible, do not include the invoices of new customers as well. This is simply because you do not know if they will pay on time or not.
- Be upfront about bad news
You should always inform your factoring company if you realize that a payment will not come through. In some cases, you may factor an invoice that you think it is a good invoice and then it turned out to be a bad invoice. When you encounter a situation like this, tell the factoring company early.
- Be attentive to notifications from the factoring company
You should always pay attention to messages sent by your factoring company. Some factoring companies may decide to inform you when they realize that a payment will be late. When you pay attention to their notifications, you will be able to act fast. It will also prevent last minute problems.
Difference Between Invoice Factoring and Invoice Financing
Another popular form of financing is invoice financing. Many people think invoice financing is the same as fact invoice factoring. Although the two forms of business financing are similar, they are not the same. With invoice factoring, the lender is willing to buy the invoice from the company and that means the customer will pay the invoice to the lender. The invoice becomes the sole responsibility of the factoring company. Invoice financing, on the other hand, means that the lender will offer you an advance to the tune of the amount of the outstanding invoice. This means that the borrowing company will pay the money back to the lender when the customers pay their outstanding invoice. You will also pay back fees and interest along with the loan when it comes to invoice financing.
Pros and Cons of Invoice Factoring
- Fast Access to Cash
When your business needs fast cash to settle an unexpected expense or anything that will help your business to grow, invoice factoring can be of help. You can get the cash to deal with that emergency as soon as possible.
- The Invoice Serves as Collateral
Sometimes, businesses cannot get access to loans because they do not have the required collateral. With invoice factoring, you do not need collateral since the invoice serves as collateral.
- Easier to Qualify for
When you want a loan for your business, lenders may ask for a long list of requirements including annual tax returns, minimum credit score, and minimum annual income. With invoice factoring, you do not need to provide most of these things. Once you have reliable outstanding invoices, you can apply.
- High Fees
Although invoice factoring is a quick way to finance your business, they are expensive. The fees are high; you can pay up to 3% as processing fees and 1% a week as factor fee.
- You will give up some of your profits
When a factoring company finances your business, you will not receive the full amount of the invoice. The factoring company will take a portion of it.
- Late payments attract higher fees
Since a factor fee is usually charged weekly, you will end up paying more if your customers do not pay their outstanding invoices on time.
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.