Invoice factoring is a financing option available to businesses that invoice businesses (B2B) or government agencies (B2G). Invoice factoring provides short term working capital in exchange for selling and assigning invoices to a factor. The factor advances the company roughly 80% of the invoice’s value. Then, once the invoice is paid, the factor pays the remaining 20% (minus fees).
Business Invoice factoring is typically a solution for short-term cash flow problems. It is frequently used as a way for businesses to simplify their cash flow conversion. Invoice factoring is not traditionally the type of financing that is used for big capital investments. This type of project is typically done with long term loans.
You find a factor you want to work with, go through the application process, and sell them all of your outstanding invoices. When you submit an invoice to a factor a few things will happen.
First, the factor will determine if you meet eligibility criteria to receive financing. They will also conduct due diligence on the customers you’re invoicing to see if they are good credit risks. If the factor decides to approve your business based on that research, you and the factor will sign a financing agreement. The agreement will set an initial maximum dollar amount that you can borrow, which is the maximum factored amount outstanding at any given time.
It must be stated that Business Invoice factoring offers fast, affordable invoice financing of up to $100K. The rates can be as low as 0.5% per week and repayment periods of 12 or 24 weeks.
Factors and their lending programs can vary significantly. Some factors specialize in lending against invoices due in 90 – 120 days while others specialize in larger or small borrowing limits. There are factors that give businesses the flexibility of easily clearing invoices for as little as $100 and as much as $100,000.
You must invoice business (B2B) or government (B2G) customers. Your customers must have good credit scores and they must be established businesses. The factor will need to feel comfortable that your customers are likely to pay off your invoice.
The invoices must be due and payable within 90 days and unencumbered by other loans. (For example, you can’t have another short term loan outstanding where the same invoice is pledged as collateral.). Your business should not have a history of serious tax or legal problems.
One of the best things about Business invoice factoring is its flexibility. You can finance specific invoices which match your working capital needs in terms of both dollars and timing. For example, if you need money to cover three weeks of expenses, you can pick an invoice to finance which gives you the cash to cover your next three weeks’ worth of business expenses.
As much as this is a good way to access cash, the short term periods of 12 or 24 weeks might not be ideal for all businesses.
Business Invoice factoring can seem a little more complicated than getting a loan from a bank. However, what makes factoring complicated is also what makes it appealing. You can borrow money based on your unpaid customer invoices to meet your immediate cash flow needs. As long as your clients pay in a timely manner, the cost of factoring is more affordable than many other short term business loan alternatives.