All you need to know about factoring companies
An invoice factoring company, also known as an accounts receivable company, or simply a factor, specializes in providing financial services to businesses that have cash flow problems due to late payments from customers. In exchange, the factor purchases the clients’ invoices at a discounted rate. The responsibility of collecting invoices from customers is also transferred to the factoring company. The services of a factoring company are paid in the form of a factoring fee or an advance rate. In most cases, factoring companies provide invoice factoring as their sole product. Some factors only work with specific industries while others are generalists. Factoring can also be used by any industry that deals with goods and services. Some of the industries that use accounts receivable factoring include business services, freight brokers, owner-operators, wholesale, manufacturing, staffing agencies, technology and many others. One advantage of working with a factoring company is that you will get immediate funding for your business. Factoring companies also work with small businesses and startups compared to other long-term financing options that only work with established businesses.
How does invoice factoring work?
A business can use invoice factoring if:
- Their customers promise to pay in 30, 60 or 90 days
- Their customers have a good credit
- The slow payments are affecting the daily business operations
Invoice factoring works in a simple and straightforward way. The factoring company purchases invoices in two installments. The first one, which is referred to as cash advance, is availed within 24 hours after the invoice is sold. This advance ranges from 80% to 90% the value of the invoices, depending on the factoring company. The rebate, which is the second installment, is deposited into the bank account after the customer has paid the total invoice amount. The rebate covers the remaining percentage less the factoring fee. Here is a clear illustration of the invoice factoring process.
Let’s say you have an outstanding invoice of $100,000. You approach a factoring company that agrees to advance you 80% of the total value of the invoice. The advanced amount, which adds to $80,000, is sent to your bank account right away. The company will hold the remaining amount until your customer pays their invoice. When the customer pays, the factoring company forwards the remaining amount which is $20,000 less the factoring fee. This fee varies from one factoring company to another.
Why choose invoice factoring?
If you specialize in any of the industries that provide goods and services, you may have some information about factoring receivables and how it works. There are many factoring companies that are known to help businesses survive and grow by providing quick funding when the business faces financial challenges due to delayed payments from customers. The question on whether invoice factoring is good for your business depends on the financial situation that you are in, your customers and your business goals. Here are some of the reasons why you should consider invoice factoring:
- Lengthy payment terms
When it comes to business, the customer is always the king, and the same applies to your cash flow. The time between completing your service and receiving payment matters for the survival of your business. In some industries like manufacturing, it can take up to 90 days for a customer to pay, making it difficult for the company to pay for their short term expenses. In this case, a factoring loan can be a good solution.
- Less time taken
If you have been in business for several years, you obviously know that applying for a traditional bank loan can be hectic. The lengthy paperwork is demoralizing and to make it worse, it can take weeks for the funds to be approved. Thanks to invoice factoring, you can have cash in your bank account within 24 hours.
- No credit check
Unlike other financing options, good credit score is not a requirement for you to seek the services of a factoring company. If your company has a poor credit score or your business is not yet established, you can still find a factoring company to work with.
- Limited resources
The work of factoring companies is not only restricted to funding invoices. They also collect invoices, manage their customers billing process among other services. This comes in handy for small businesses that have few resources and employees
- Explosive growth
Invoice factoring is not only meant for struggling businesses. It can also be used for the growth and expansion of a business. The speed and flexibility that comes with invoice factoring has increased the growth of many companies, allowing them to dominate their competitors.
Best invoice factoring companies 2018
The company offers all its services online. They provide fast funding with simple and transparent terms to help business owners improve their cash flow. The company pays for invoice due in 15-90 days. The loan amount ranges from $20,000 to $2.5 million with a fee between 0.5% and 1% per week. The advance rate is between 85-95% of the invoice amount, which is provided within 24 hours and the remaining amount, which is less the factoring fee is forwarded once your customer pays.
The company initially started as a freight factoring company. It currently services several industries including wholesalers, security, manufacturing, staffing, transportation, business services and oil and gas. With Triumph, you can receive up to 90% advance rate within 24 hours. The invoice is then forwarded to your customer for collection. The remaining 10% less the fee is paid once the invoice payment is collected.
- Paragon Financial Group
This can be a good option for small businesses that need short-term funding. The factoring amount ranges from $25,000 to $10 million per month. The discount rate is between 1.25-2% per month. You will also have to pay a small one time origination fee. The company provides an advance rate of between 80-90% of the invoice value. Initial funding is provided within 24 hours for established accounts.
- TCI Business Capital
With TCI Business Capital, the discount rate is re- evaluated every month depending on your experience in the last one month. The factors determining the rate includes the time taken for customers to pay and the factoring amount. The rates lie between 1-4% per month. The factoring amount is between $50,000 and $20 million per month with an advance rate of 90% of your invoice value. You can be approved in 4 days and receive the funds within 24 hours. The company pays for invoices due in 30-90 days.
Compared to other factoring companies, altLINE provides a tiered discount rate system. The fee is cheaper when the invoices are paid quickly. The discount rate ranges from 0.75%-3.5%, which increases every 15 days. You also have to pay a one-time origination fee of $500. The minimum borrowing amount is $30,000 with a maximum of $5M per month. The advance rate is 90% the value of your invoice and once approved, you will receive funding within 24 hours.
Things to consider when choosing a factoring company
Once you decide that your financial problems can be addressed through invoice factoring, the next step is to find a reputable factoring company to work with. There are so many factoring companies in the United States and this makes the factoring rates competitive, but it can also lead to confusion when you are looking for the best company to meet your financial needs. Here are some of the things to look for in a factoring company:
- Terms and fees
Before signing your agreement with a factoring company, pay close attention to the fee charges. The factoring fee varies depending on the factor and the company they finance. Some factoring companies only charge a percentage of the total invoice value. But other factors charge additional fees for shipping, money transfers including other costs. Ensure that the company is transparent with you about the fees they charge.
- Recourse and non-recourse factoring
You also should know the difference between recourse and non-recourse factors before factoring. This will help you decide the type of factoring that will work best for your business. With recourse factoring, you are responsible to pay any uncollected invoices. This gives an advantage to the factoring company since they can always be paid by the client in case a customer defaults. Non-recourse factoring, on the other hand, is a form of secured debt where the business sells the invoice to the factoring company.
- Experience and capital
It is important that you work with a company that has been financing businesses for several years. With so many companies that offer factoring services, some of them are only start ups with minimal experience. You should find more information about the factoring company including their customer base and capital structure. Established companies are better in offering factoring services than startups.
- Additional services
Besides increasing the business cash flow, there are other benefits that come with invoice factoring. If the factoring company also collects customer’s invoices, it will help you save on both time and resources. The best factoring company should also offer quality customer service. This includes matching you to a representative who can address any concerns you might have on time.
Factoring companies play an important role in the current business world. They prevent businesses from getting into a working capital crisis and achieve operational efficiency. Businesses should enter into factoring contracts once they consider their requirements. Relying on factoring financing will not only help your business meet immediate financial needs, but will also help achieve your long-term business goals.
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.