Small to medium sized businesses in an array of industries can make use of invoice factoring companies to improve their business financials. Whether you need capital to grow your business, complete a purchase order, improve your cash flow, or just get through a slow season, invoice factoring can work with your to meet your business’s needs.
What Are Invoice Factoring Companies?
Factoring companies offer alternative financing services based around buying unpaid invoices that are in good standing, to free up cash flow and help businesses grow and thrive. These financing services fall outside the scope of traditional commercial financing such as banks. Invoice factoring companies offer financing based on the value of your invoices and the credit score of your client, not your business. This is different than standard banks, which offer financing based on your credit score and business history.
Gain Fast Funding Quickly From Accounts Receivables
Businesses choose to work with invoice factoring companies so they can collect on their current receivables in days rather than weeks. Not only does this put them in the driver’s seat of their business financials, it also improves cash flow and business liquidity.
By factoring their receivables, businesses can have cash at the ready to grow their business or cover the costs of ordinary or unexpected business expenses. You the business owner are under no obligation to use the financing for a specific or agreed-upon purpose as is usually the case with banks.
For expediting payment of your receivables, you pay an agreed upon percentage of the total invoice to the invoice factoring company. Depending on the company, there may be other fees associated with these services. Each invoice or freight bill factoring company charges rates a little bit differently so do some comparison shopping to reduce your costs.
How an Invoice Factoring Company Works
- To get started with a freight bill factoring company, you will first be asked to fill out an application, which usually takes about 30 minutes or so.
- Once you submit your application and are approved, you can prepare to submit an invoice that day. It is important to take some time and choose the best client for factoring, which means a client with an excellent history of paying its bills on time. This will reduce your expenses and generally make the process go faster.
- Now that you have selected your preferred client, it’s time to submit that invoice. You can choose to do this in person from a local business or online from a national firm. The invoice factoring company will handle all aspects of collecting and processing the receivable; there’s no need to notify the client personally. Because the proper handling of receivables is important, you want to make sure you choose to partner with an invoice factoring company you can trust to professionally manage your invoices and client communications.
- Next, the freight factoring company will run a credit check on your client, often referred to as the debtor. If the client proves to have good credit, the factoring process will proceed. If not, you will not be able to use this client and will have to submit another invoice.
- Lastly, within 2-5 business days, the invoice factoring company will deposit 80 or 90 percent of the total invoice value into your account, minus the factoring fees.
Now you have money in your account in 2-3 days instead of 30+ days, which is the number one benefit of working with an invoice factoring company.
What Do Invoice Factoring Companies Charge?
Calculating fees and total costs can get a bit thorny. So for easy math, if you are factoring $50,000 at a rate of 3% per month, the cost is $1500.
So with a 90 percent advance, you will get $43,500 ($45,000 – $1500) deposited in your account immediately; the remaining $5,000 will be deposited into the account once the debtor, your client, remits payment to the factoring company.
Generally speaking you want to work with a factoring receivables company that charges either a flat fee or a monthly fee. They will almost always cost less than weekly fees. It is important to remember that costs can vary considerably from one firm to another so it is worth your time and energy to shop around.
Choosing The Right Provider
A long-established invoice factoring company with a proven record for excellence might charge more than a newbie company eager for business. Cheaper isn’t always better. One local company might prefer to do business face to face while another only offers online services and interactions. Again, by searching our website, you can do your comparison shopping to find the invoice factoring company that’s best for your business.