What is Invoice Factoring?
When we take a closer look at invoice factoring, also known as invoice financing, you’ll discover how AdvancePoint Capital can help your business succeed. Invoice factoring companies offer an alternative route to the financing your business needs to succeed. Whether you’re dealing with a poor credit history, time in business or you’re tired of dealing with traditional funding options — invoice factoring offers a different approach you can take to get the cash flow you need now.
If your business deals with a constant influx of invoices, you already understand how difficult it can be to live on the edge of whether or not a customer pays. Day to day operations rely on these payments, and when invoices begin to pile up, your cash flow situation becomes a gray area. That’s where invoice factoring comes into play.
Through invoice factoring, you’re able to collateralize invoices in exchange for a loan from a factoring company. For roughly 85% of the total amount of the invoice, you’re able to get cash flow fast. What about the remaining 15%? Well, factoring companies hold this amount in reserve. A portion of it will be returned to you, and the rest is subject to factoring fees and processing fees. These fees are dependent on how long it takes a customer to pay and are calculated based on a weekly schedule.
When it’s all said and done, these fees are a “convenience fee.” If you need cash fast, and you have unpaid invoices, invoice factoring offers a solution you can fall back on. Invoice factoring companies are essentially purchasing your invoices and returning a portion of the return to you for a small fee. The convenience of invoice factoring comes down to two main factors.
- You need fast cash to keep your operations running smoothly. Invoice financing offers a way to deal with outstanding invoices by trading a portion of their total for cash on hand.
- You’re unable to receive financing from traditional institutions like banks or other lenders. Because lenders are primarily concerned with the fact that the customer pays for the invoice, you essentially become a third party. The company with outstanding invoices receives the brunt of the credit inquiries and other qualification pressures — which is perfect for those with poor credit or limited time in business.
Why you should consider invoice finance to help your cash flow:
- Unlimited Capital
- Factoring is Fast & Easy
- Factoring Helps Build business Credit
- Retain Your Equity
- Detailed Management Receivable Reports
- Leverage expertise of an Invoice Financing Company
- Invoice Factoring is NOT a BUSINESS LOAN. No Debt to Repay
- Enhance Your Purchasing Power
It can be frustrating to wait on invoices to be paid, so why not get the cash you need now? Those who are growing know — you’re constantly keeping up with your customers and it can be frustrating with clients who don’t pay on time. It becomes the snowball effect. Delayed payments block up your sales funnel where funds get cycled back into your company right away. It can be a huge step back from providing great service to your own customers. We see this issue far too often here at AdvancePoint Capital, which is why we offer some of the best invoice financing opportunities available. As your factoring company, we can offer a different approach to getting paid for your invoices fast. Skip the wait and give invoice financing a try.
How Does Invoice Factoring Work?
Step 1. Invoices are Issued to Clients
The first step in the process is pretty common and simple. An invoice is created in order to invoice a client based on an order that has been completed, letting the client know how much they owe for the order and when payment is due. This is also called the “net” terms.
Step 2. Submit Invoices to Factoring Company
The invoice is then sent to the invoice finance company for review and processing based on the terms of the invoice financing agreement. This can be done by an online management portal that the invoice finance company has or through a designated email.
Step 3. Getting the Advance Payment
Factoring companies will process and verify the sent invoice(s) that are being “sold” to them and will then give you the advance payment, typically worth 80 to 90 percent of the total invoice, depending on your Invoice Factoring Agreement. The advance payment is the first payment, the immediate cash you get as the business owner of Invoice.
Advance payments are made by ACH via direct deposit to the business owner’s bank account. If you need the money sooner than an ACH, you may ask your factoring company to send you the payment via wire transfer as an alternative to ACH which can take a business day or two.
Step 4. Collecting on the Invoice from the Client
Invoice factoring companies responsible for the collection of the outstanding invoices submitted. Invoices are payable within a certain period of time, and at some point, the client is required to make the payment to the factoring company based on the net terms that were approved by the Invoice Finance Company prior to the process beginning. When the client has paid in full, the factoring company receives the money and the invoice is settled with the client.
A schedule of accounts and accountability of all invoices being advanced are usually available with an online portal provided to the business owner by the Invoice Factoring Company. Sometimes, smaller Invoice Finance Companies may email the “daily schedule of accounts” which lists the invoice(s) that the business owner “sells” them, the amounts as well as the due dates of invoices.
Step 5. Business Owner Receives the Remaining Funds from the Invoice
When the invoice has been paid in full, the business owner receives the remainder of the invoice proceeds, less the Invoice Factoring fee(s) set forth in the business owners Invoice Factoring Agreement.
Invoice Factoring Means Instant Cash Flow
If you could trade your outstanding invoices for instant cash, would you? Well, that’s how invoicing finance opportunities come into play. Essentially, invoice factoring allows you to utilize an outstanding invoice as collateral. Yes, there are processing fees and factoring fees — so it can be an expensive option. However, company after company have used this funding option to their advantage to get a more predictable cash flow solution.
Perhaps you’ve hit a rough patch in your business, this happens all of the time. Or, maybe you’re running low on capital. Whether it’s getting started on an upcoming project, handling taxes, or making payroll — cash on hand is a crucial part of running a company. If you have outstanding invoices, you’re missing out on the capital you need to keep your operations running smoothly. Invoice financing can give you peace of mind.
Financing & Fees of Invoice Factoring
Invoice factoring is a simple method that small business owners like you utilize to tackle bills or immediate costs. There are fewer qualifications required because the risk to the lender is less than alternative financing options. However, there are still fees and restrictions involved with invoice factoring.
This type of financing solution works through processing fees and factoring fees, which requires a bit of math to understand. Let’s explore an example of how you may experience invoice factoring.
Let’s pretend that you have a $10,000 invoice with 30-day terms — how might this scenario turn out?
- AdvancePoint Capital gives you 90% of that amount, equalling $9,000, while holding the remaining amount, $1,000, in reserve.
- Once the invoice is paid, the customer then pays the finance company (AdvancePoint Capital) a financing fee of 3% ($300)
- The factoring fee is applied, which in this scenario is 1% per week — for two weeks
- After that two weeks are up, the 2% factoring fee equals $200
- The financing company (AdvancePoint Capital) pays the customer back the money that was held in reserve, which is $1,000
- At the end of the day, you’ve paid $500 of your original $10,000 invoice for immediate, upfront payment of $9,000 from the financing company.
In our example, you can see how this is a sound option for quick cash flow, especially when your company is strapped for capital in the short term. However, if you’re looking ahead to the future and see better finances on the horizon — this is a great way to mitigate immediate cash concerns for your small business.
Is Invoice Factoring Worth the Cost?
The answer to this question depends on your business. You may be thinking that the costs associated with invoice factoring are steep. Well, if you’re in need of quick cash for your business — invoice factoring may be the best option. Say you need money to make payroll or complete some much-needed renovations for your business, then invoice factoring may be a sound choice, and lender’s fees may not look too shabby.
Really, it comes down to weighing the pros and cons of your business’s current financial circumstances. If quick cash flow could drastically affect your business in a positive way — a fast capital alternative from outstanding invoices can be a great way to move forward. As a business owner, you need to make sure that you consider all of the possible financial avenues you can take for your company. Whether it’s by taking a close look at the invoice amount, the number of outstanding invoices, or how bad the cash flow situation is — a little research and help from invoice factoring companies like AdvancePoint Capital can make a significant impact.
Features of Invoice Factoring
Invoice factoring has a lot of unique benefits and features that small business owners can take advantage of for their company. This financing solution removes the painstaking process of waiting for invoice payments — because these outstanding invoices act as collateral for future cashflow. Plus, the funding is based on the credit of the invoiced business, which gives businesses that may be struggling with their own credit history can receive funding.
This financial product allows you to finance up to the full amount of the invoice that will be advanced. The financing company is charged with managing the collection of payment from the client or customer, which means you don’t have to worry about collecting the invoice collateral yourself. It’s a simple and flexible option for small business owners looking for an ideal quick-fix funding solution for their business.
If you need cash flow fast, use your unpaid invoices through invoice factoring. In as little as one business day, you can have the advance in your bank account and ready to be used for working capital, renovations, or whatever your business needs are. Factor costs are typically between 1% and 3% of the invoice total — plus any other processing fees. This is all dependent on the company you work with.
The fast, convenient and straightforward way to get the money you need for your business – now! Get Your Quote Today by filling out our simple form.
What are the Qualifications of Invoice Factoring?
It’s simple, really. Any business that has a B2B model with outstanding receivables can qualify for invoice factoring. This financing opportunity is far different than the majority of advances and loans because it doesn’t rely on the business owner’s revenue, time in business, profits, or personal credit history. So, it’s perfect for small businesses struggling with credit issues or that just started up and don’t necessarily have the years in the industry to receive funding.
Lenders are not nearly as concerned with these traditional qualifications with invoice factoring. Instead, they take a deep look at the invoice itself, because it is the collateral they will use to advance cash to your business. If you’re curious about the amount you’re able to qualify for with invoice factoring, you’ll need to look at your invoices as well. The advance maximum is based upon the total amount and quality of the unpaid invoices — with a slight look at your creditworthiness.
Generally speaking, financing companies look for an average monthly account receivable ledger of around $50,000 from the business owner. However, depending on the lender, exceptions can be made to account for a wide range of variables.
Finance companies will take an in-depth look at the creditworthiness of the consumer that is on the invoice rather than the business owner who is receiving the advance. A finance company is far more concerned with the credit of who is on the invoice bill because they are who will be making the payment.
What is Required to Apply for Invoice Factoring?
Because invoice factoring utilizes such a unique methodology, it’s actually easier to apply and qualify for. Since the collateral is in invoices, rather than in assets of the business owner, the person paying back the lender is responsible for creditworthiness and other qualifications. To apply for invoice factoring financing and eventually get approved, you must provide the following.
- 1-page Application
- List of names of business and contact info you are invoicing
- Accounts Receivable Ledger
- Actual invoices and their terms
Eligibility for invoice factoring is much laxer than alternative forms of funding. If you have unpaid invoices and you’re looking for a fast funding option for your small business — invoice factoring is a great option.
- A simple one-page application
- A/R and A/P reports
- No Credit Checks for Business Owners
- A Line of Credit up to $2.5M
- Receivables due in up to 90 days
- Free up cash trapped in bills
If you need money fast and don’t want to deal with the complex issues plaguing alternative forms of financing, invoice factoring is a great way to get the money you need for your business now. Fill out our simple form and Get Your Quote Today!
Approved for Invoice Factoring — What’s Next?
Once you’re approved for invoice financing, you will get a “Letter of Intent” or an “Approval Terms Disclosure.” These documents describe the terms and fees of the invoice financing relationship and are important statements you should know about.
The following items should or may be covered in the Letter of Intent or Approved Terms Disclosure:
Maximum Advance Amount– This would be the total amount that can be advanced off of invoices. This amount would be similar to a credit limit for a business line of credit.
Advance Rate– This percentage is the approved net collectible value of each amount Invoice Finance Companies elects to purchase. Typical agreements are up to 80% to 90%.
Services Offered- This details the receivable management services and responsibilities of the Invoice financing company. This should include credit management, collections, cash application, and access to real-time online reporting.
Service Fees- A service fee may be charged with the face amount of each purchased account, for the first 30, 45, or 60 days aging typically; and then a different percentage for each set amount of time thereafter. Typical fees range from 1% to 2% within net terms and the .5% or more beyond net terms thereafter for a future set amount of time.
Due Diligence Fee– This non-refundable documentation and due diligence fee may be charged to a client at the time of acceptance of the proposal or offer. This is common, but not always charges and is usually between $250 up to $500.
Minimum Fee– A percentage of the maximum advances per month. This is only charged if the difference between the Monthly Minimum fee and the fees actually paid if the monthly minimum fee is greater. (This fee is typically 1%)
Audit- Invoice factoring companies may require audits from time to time, in which clients agree to pay invoice finance companies for all reasonable out-of-pocket expenses for performing such an audit.
Contract (Agreement) Term– Lists the term of the agreement or contract. Usually (6) months to (1) year.
Collateral– Usually a first priority perfected security interest in Client’s accounts, invoices, chattel paper, contract rights, general intangibles, books and records, and all proceeds of the foregoing are required.
Other Conditions– Any other conditions that might affect agreement.
Guarantees– The business owner(s) should expect Personal Guaranty from the principal shareholder(s); Corporate Guarantees from any parent entity and all wholly-owned subsidiaries, if applicable.
Additional Key Features of Invoice Factoring
- Deal size is $100k to $10 million
- Advance rate is 80%- 85% (can do 90% for staffing and trucking)
- Pricing depends on volume (example: $2 million volume, we can price it 1.5% for 30 days, 2% for 45 days, 2.5% for 60 days)
- Pricing 1% to 3% depending on the risk
- Most of our factoring facilities are non-recourse
- Recourse is an option for healthier companies (profitable with strong guarantors)
- We can work with IRS tax issues, poor credit, etc.
- Terms can go out 120 days and exceptions to 150
If you’re a business owner that charges clients through invoices but you need cash flow fast, invoice finance opportunities are a great way to get the money you need. Small businesses can leverage their unpaid invoices through invoice factoring and get the money they need. Regardless of the invoice amount, you can get the cash you need in a pinch for renovations, working capital, and more with AdvancePoint Capital’s invoice factoring. For those that have had difficulties obtaining other types of business loan products, invoice factoring could be a perfect option.
Discover how you can qualify for one of the best loan products for small businesses through the invoices your customers haven’t paid yet. Invoice factoring, also known as invoice financing, is a perfect way to get cash fast.
Frequently Asked Questions About Invoice Factoring
What Can I Use Invoice Factoring For?
Invoice factoring, also known as invoice financing, can be used for a wide range of industry needs. Whether it be payroll, taxes, expansion, renovations, or getting started with an upcoming project —invoice financing from a trusted factoring company can get you capital fast.
What’s the Difference Between Invoice Factoring and a Traditional Business Loan?
Well, invoice factoring uses your outstanding invoices that customers haven’t paid yet as collateral. What this means is that these customers are the ones that are looked at when an invoice factoring company checks for credit histories and time in business. The amount you pay for your loans depends entirely on the invoice amount, as it’s subject to various processing fees and factoring fees. Invoice factoring is a great alternative to traditional business loans for a company that has outstanding invoices from its customers.
How Do I Pay Back a Factoring Company for Invoice Factoring?
Factoring companies take out a percentage of the total amount of the invoice, which is held in reserve and is subject to various processing fees and factoring fees. These factoring fees can be something like 1% per week until the customers pay. However, once customers pay, the factoring company pays back what they held in reserve, minus the amount they deducted for processing and factoring fees. When it comes down to qualifying, as a lender, a factoring company is more concerned with your customers and their credit histories. Because, when push comes to shove, a factoring company has essentially purchased the outstanding invoice.
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Get your Quote Today by filling out our simple form.