WHAT IS INVOICE FACTORING?
If you think that Invoice Factoring is like taking a loan, you should take a step back and think again. Invoice Factoring is not a loan. It’s a simple process to get the financing done against your uncleared invoices. You give the factoring company all your uncleared invoices against which they give you the 70-90% of the payment. Then the financing firm chases all your clients to get clearance from them.
In a nutshell, the money that you get from the process of Invoice Factoring is the money that you have already earned. That is what makes it very different from a loan. Read on to find out more about Invoice Factoring.
HOW DOES INVOICE FACTORING WORK?
As we mentioned before, the process of Invoice Factoring is simple.
We will break it down for you step-by-step.
First of all, you hand over all your uncleared invoices to the invoice factoring company.
Then they will verify whether or not your invoices are honest-to-goodness and begin to do the processing. This step is necessary because the factoring company needs to know that your clients are genuine.
Once your invoices get verified as OK, the factoring company will pay you most of the invoiced amount, which would be between 70% to 90%.
Now, since you are free from chasing the clients for the payment, the factoring company will do the client-chasing for you.
Your clients will now have to pay the invoiced amounts to your factoring company.
Finally, after receiving the full payment from the clients, the factoring company will clear the balances with you after cutting their share of the fee according to the agreement.
Invoice Factoring FAQ’s
What types of businesses use invoice factoring?
Businesses, of all sizes, selling goods or services to other businesses can use invoice factoring. When you produce an invoice for goods you deliver or services you render, you can use invoice factoring. Industries include staffing, transportation, manufacturing, distribution, information technology and many others.
How long do you require to be in a trade, to qualify for invoice factoring?
Both old businesses and start-ups, that have invoices, can get funded. Even if you don’t have an invoice, but just secured a new contract, you can use invoice factoring.
Can you use invoice factoring if your credit score is low?
Yes, you can. The credit analysis of invoice factoring does not solely depend on you, but on your company, and the quality of your clients, as eventually they will be paying your invoices.
What is the approximate factoring fee?
You can expect factoring fees to be somewhere between 2%–4.5% for the first month and then about 0.5% for every additional 10 days that the invoice remains unpaid. Some factoring organizations offer a flat rate where a one-time fee is charged upfront while others might charge in a pay-as-you-go format.
What all documents do you need to apply for invoice factoring?
You will need a driver’s license, articles of incorporation of your business (LLC, Corporation, or other), your business tax I.D. and financial documents like balance sheets, profit and loss statements, corporate tax returns and bank statements of the last three months.
How long does invoice factoring take to get approved?
Once you give all the necessary information and submit all documents, the invoice factoring application takes 24 – 48 hours to get approved.
How beneficial is invoice factoring for you?
Through invoice factoring, you can get:
- 80-90% of your invoice amount upfront, in cash.
- Immediate cash advances.
- The option of using it only on the customers you choose.
Which kind of invoices are eligible for factoring?
- Current invoices.
- Invoices payable by another business.
- Unpledged invoices that no other company can claim.
Is there a limit to how much funding you can receive?
No. There are no maximum amounts for funding. If you have the invoices, you can get the funds.
How does invoice factoring work?
- The invoices are submitted.
- Verification is done by the factoring company and the fund is transferred to you within a day or two.
- Payment is collected from your customers by the factoring company, as per the payment term decided.
- Once the payment is received, the factor releases the remainder of the invoice amount, after subtracting a small factoring fee.
MERCHANT CASH ADVANCE
The Merchant Cash Advance is taken against the credit/debit card payments that a merchant receives on a daily basis.
BUSINESS LINE OF CREDIT
While at first glance, a business line of credit might sound similar to a small business loan.