Invoice Factoring (2024)

B2B organizations typically offer credit terms to their customers. These can sometimes range between 30 and 90 days. However, most businesses can’t wait that long to receive payment from their customers because they have to manage other important expenses to keep the business operations running smoothly.

What is Invoice Factoring?

Invoice factoring is a solution thatreleases cash tied up in your outstanding customer invoicesso you can get paid when issuing invoices.

Most banks and traditional lenders do not allow cash advances for businesses with poor credit history. But with a factoring company (Factor), the amount of cash advance is typically based on the value of the company’s invoices, not the credit score.

What is Invoice Factoring

Invoice Factoring is Accounts Receivable Financing. You are able to generate working capital from your unpaid invoices.

How Invoice Factoring Works

Three parties are involved in factoring financing arrangement; Your business, your customer, and the invoice factoring company.

The process is simple and straightforward. The factor buys the company’s outstanding invoices from creditworthy customers. It provides them with working capital as a way of improving cash flow and reducing operating expenses. Here are the steps to understand it better:

To obtain factoring financing, the factoring company will have to review your eligibility and conduct due diligence on your customers. Once your application is approved, you will sign a financing agreement that also states the initial amount you can borrow.

You would deliver goods or services to your customers and offer credit terms. You would then send a copy of the invoice to the factoring company. Once they’ve received and approved the invoices, they will release up to 98% of the invoice value in your bank account, which is often the same day.

Your customer would then pay to the terms and make payment to the factoring company. At this point, the factoring company owns the receivable, right through to receiving and posting payments from the customer.

Once the factor received payment from your customers, they will release the remaining balance to you. Note that there is a monthly factor rate to be deducted.

Invoice Factoring Process

1. Apply
2. Submit Invoices
3. Credit on Debtors and Verification of Invoice
4. Funding Generally Takes 24 Hours
5. Unpaid Invoice is Collected from Debtor
6. Remaining balance minus interest expense released to client

For some businesses, particularly small companies and startups with limited capital, factoring is the best solution. The main benefit of invoice factoring is that it provides immediate cash that’s tied up in unpaid invoices. Also, factoring offers the following advantages for business;

The secondary reason why a lot of companies use factoring is that it maximizes their business cash flow, especially from their slow-paying customers. Giving long payment terms to clients is often necessary to ensure their loyalty to your business. Most large customers will require you to offer them terms. So the only way you work with some customers is by accepting their terms. Factoring allows you to get your money immediately and avoid any cash flow problems.

Some spot factoring(single invoice factoring) companies offer a one day process application. This means that if your business badly needs a tremendous amount of money to fund something important, then factoring is the best choice. Allowing businesses to take on larger projects that they would otherwise not be able to pursue.

A traditional bank loan process can take up to three months to get approved. Also, not to mention that every bank has different criteria for approving a loan. Spot factoring, on the other hand, all you need to provide is an invoice from a business customer that has a good credit background.

Collecting accounts with 30 to 60-day terms is quite a daunting task, especially for many businesses, especially startup companies. Many startup companies do not even have a collection department to handle these tasks. Whenever you sell an invoice with a factoring company, they will handle the collection process for you.

Factoring allows your business to take on new jobs without needing to wait on payment from completed jobs, providing companies enough capital to meed demand.

Reasons businesses factor invoices

• Pay Employees on time
• Hire More Staff when needed
• Cover Operating Costs to Maintain Cash Flow
• Maintain Growth Rate and Expansion
• Grow your Accounts
• Pay Bills on time
• Take on more projects

Factoring rates are controlled by the factor’s risk of buying invoices and the factoring volume. High-risk transactions with low volumes qualify for higher factoring rates while low-risk transactions with high volumes get low factoring rates.

Elements that Determine Factoring Rates

Monthly Factored Volume

The monthly factored volume is the most essential variable in determining the rate since factoring is a volume-based business unlike in a wholesale company. This means that high volumes of sales result in having discounts and getting a lower per-dollar rate is expected.

Average Invoice Size

The size of each invoice is vital because the factoring business is very labor extensive. Processing a single $10,000 invoice is easier than doing ten $1,000 invoices. Although they have the same total amount, the labor affects the costs with much work done compared to completing a single invoice.

On the other hand, the rate would be almost the same for ten $10,000 invoices and a single $100,000 because the individual invoices are large enough in generating the revenues needed in covering the labor cost.

The Industry

The industry affects the rates. Transportation, staffing, and consulting are low-risk industries that often get lower rates and better terms than other industries. Meanwhile, those industries that often get higher rates are risky ones such as construction or labor-intensive industries like healthcare.

The Applicants Credit

The clients’ credit quality is used as a deciding aspect of whether or not an invoice will be funded. This thing has only little significance on the rate, contrary to what everyone thinks.

Credit of Company that is paying invoice

The business stability and trading history are being assessed by factoring companies in making a rate decision. Those companies with long and steady history are considered safe and they get lower rates. However, new companies or companies with unstable sales are perceived as risky and they frequently receive higher rates.

Single Invoice (Spot) Factoring vs Long Term Factoring Relationship

Single invoice factoring is where a business is selling one invoice, usually a larger one. Factoring one invoice is typically more expensive than establishing a long term factoring relationship.

Since every small business is affected by cash flow issues, this can be addressed by using business tools, including factoring, for the influx of capital to cover it without putting the business into debt.

Recourse and non-recourse factoring arrangements differ in liability to the business looking to factor receivables. Knowing the difference between these two will help shape your overall business as well as cash flow strategies.

What is non-recourse factoring?

Under non-recourse factoring service, there is an agreement between the client and the factor wherein the factor shall bear the responsibility to absorb the cost of receivables that remain unpaid. This will make the credit risk stay with the factor and not with the client. The business gets unaffected and can continue to function without having to worry about bad debts.

Advantages of Non Recourse Factoring

• The borrowers can get the cash they need to improve a crunch without risks if any of the customers will not pay.
• Non Recourse factoring can work as credit insurance, the borrower can access the factoring money without risk the risk of extending terms to the customer.

Disadvantages of Non Recourse Factoring

• With Non-recourse factoring, also known as a secured debt of collateral. The cost of financing is typically higher than full recourse factoring. It is a higher cost because the risk is on the factor/lender and not on the client/borrower.

What is full recourse factoring?

In recourse factoring, both the client and the factor agree on a settlement wherein the client needs to buy back the unpaid bills receivable from the factor. This will make the credit risk stay with the client and not with the factor in case of the debtor does not pay. The risk of bad debts always remains in the business.

When calculating the factor, the entire sales ledger differentiates and is not according to the creditworthiness of any individual customer.

The trade-off is price versus risk. If the company has reliable customers, this is worth setting up full recourse factoring. A good option for businesses that have been working with the same clients for long periods of time and have a positive payment history.

Construction Industry Factoring

Types of Construction Companies that factor invoices

It does not matter what type of construction specialty and industry such as underground utilities, electrical, roofing, flooring, landscaping, site cleanup, asphalt, concrete, demolition, directional drilling, excavation & hauling, HVAC, interior finish, paving, painting, plumbing, and structural steel among others. All construction-related companies, including general contractors and subcontractors across all sub-trades, are covered.

• Cell Tower
• Concrete Contractor
• Demolition Contractor
• Flooring Contractor
• Paint Contractor
• HVAC Contractor
• Structural Steel Contractor
• Specialty Finishing Contractor
• Excavation Contractor
• Electrical Contractor
• Road Construction Contractor
• Landscape Contractor

What is Construction Invoice Financing?

The cash advance made for outstanding receivables is called construction invoice factoring. This technique lets construction companies borrow cash advances for their invoices. The construction company is technically selling their outstanding invoices to the construction factoring company.

construction invoice financing is not considered a loan. Once a business gets approved for construction invoice factoring, they can access funds for outstanding invoices within a few business days.

Invoice factoring is ideal for construction companies or subcontractors that issue invoices with net terms between 15 to 90 days. For those companies who have immediate expenses with a high volume of incoming invoices, they must be considering construction invoice factoring. Also ideal for construction invoice factoring are those companies who need funds faster than possible with a loan as well as those who may not qualify for other types of loans.

Why Construction companies factor their invoices

Unlike other industries, construction payment comes months afterward, even after the work gets completed. Invoice factoring allows construction companies to get paid when they invoice, allowing them to improve cash flow. Here are some of the benefits of construction companies factoring invoices.

Since payments on construction companies come slow, it is often hard to keep cash reserves for dealing payments for payroll and overhead. To float payroll and overhead, a large portion of the outstanding invoice can be paid in advance through factoring construction invoices. This is done, as it is not possible to pay employees, rent, and other bills at the same irregular schedule depending on when the client makes a payment.

As cash comes irregularly and goes out steadily, this makes it difficult for a construction business to grow. In the case of bigger jobs, it can stretch a subcontractor thin. However, a business cannot grow without taking larger jobs. Still, factoring for faster company growth is being practiced by some construction businesses.

For business expansions by contractors or subcontractors, bidding on a larger number of jobs may be necessary. Nonetheless, this also means working with companies beyond normal and old customers. It is natural and healthy to be skeptical when working with new customers. With this, some of the risks of slow payment can be protected with factoring construction invoices. This is because factoring companies only factor invoices on reliable creditworthy customers. If the factoring company is not able to factor the invoices that means you probably should not be working with that customer anyways.

In buying new equipment whether for growth or for replacing something broken, construction businesses shell out cash. Still, this can be resolved by factoring an invoice if businesses do not have cash reserves. Through such a method, there will be no need for businesses to take credit on its assets.

• Lien compliance for providing a basic understanding of lien laws in your state as well as in tracking and maintaining compliance with the various state regulations.
• Bookkeeping services are similar to having an entire accounts receivable department at your service. To help in managing financial aspects of the project, bookkeeping is done from paying your subcontractors and suppliers to getting their lien waivers.
• Risk management helps you understand the financial risks before providing a quote, bid or proposal as well as before entering into contracts to make negotiations possible.
• Contract compliance for reviewing contracts and to help you understand the terms and conditions.

Types Of Construction Factoring

Spot factoring and contract factoring are the two primary options to factor construction invoices.

Construction Spot Factoring

Spot factoring is single invoice factoring where you are generally factoring one invoice as opposed to a contract. Spot factoring refers to a “one-off” situation. Through spot factoring a construction business, factoring a specific invoice is done to float the cash that they immediately need. It is suitable for businesses that do not have a lot of cash flow issues but have a specific event or problem caused by a setback with financials. Made to get a company out of a bin, the invoices in this type of construction factoring are more likely to be expensive compared to contract factoring.

Construction Contract Factoring

With contract factoring, cash will be provided for every progress payment made on a larger scale. The rate charged by the factoring company will decrease when a larger number of invoices are being processed. Steady cash flow is guaranteed for the job duration when factoring construction invoices is used for the whole life of the contract. The construction company can receive the cash earlier for every invoice processed for a progress payment.

Difference between Construction Spot Factoring and Contract Factoring

Primarily, their difference is volume as spot factoring is used for obtaining cash for a single invoice or pay the application while in contract factoring, a longer-term agreement is set wherein a certain percentage of invoices are sent to the factoring company.

Construction Spot Factoring Vs Contract Factoring

Factoring can provide cash flow to construction businesses depending on your priorities. Spot factoring is ideal for turning invoices into cash that can be used immediately if you have an unpaid invoice from a contractor or property owner who pays their bills on time. Contract factoring is best for those who are looking for company growth as regular cash flow can give way to holding of bigger projects.Pre-Qualify Now

Staffing Company Factoring

Types of Staffing Companies that can benefit from Invoice Factoring

• Warehouse Staffing Companies
• IT Staffing Companies
• Medical Staffing Companies
• Manufacturing Staffing Companies
• Accounting Staffing Companies
• Administrative Staffing Companies

What is Staffing or Payroll Factoring

Staffing factoring, also known as payroll factoring allows Staffing companies the ability to get paid upfront on invoices. It is a funding solution that can be used by staffing companies such as healthcare staffing firms, Human Resources consulting firms, headhunters, general staffing agencies, Information Technology staffing agencies, and many more. These agencies can be paid at unpredictable times and in different terms. Funding can be difficult for them because of the delay in payment, more so, if the companies keep on growing. For them to overcome their cash flow management problems, they sort to seek help from the factors and apply for invoice factoring.

Requirements for Staffing or Payroll Factoring

1. Invoices

Factors have a different set of requirements when accepting invoices. Some factors accept only a minimum amount of invoices due within a specific day, while there are factors that accept applications with no minimum amount of invoices. Typically invoices need to have terms less than 90 days.

2. Credit Worthiness of Customers

Staffing factors check the staffing companies’ customers – if they pay on time or not. They also check the standing of their customer, whether they are creditworthy customers or not.

While the above mentioned are the typical requirements when applying for payroll factoring or staffing factoring, some factors are very flexible in requirements.Pre-Qualify Now

Oil and Gas Industry Factoring

• Crude Haulers
• Exploration Services
• Environmental Cleanup
• Excavating and Digging
• Inspection Services
• Rig Movers
• Gravel Pit Suppliers
• Vacuum Trucks
• Drilling Companies
• Casing and Surfacing Companies

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Trucking and Freight Factoring

Types of Trucking and Freight companies that benefit from factoring

• Long Haul Trucking
• Owner Operator Trucking
• Short Haul Trucking
• Fleet Trucking
• Same Day Funding Programs

Owner Operator Trucking Factoring

In the freight business, the ability of the owner-operators to cover their expenses is required. Cash must be flowing to avoid delays in truckings. However, not all customers pay in full until the work is done and payments are usually done via invoices which means the owner-operators should wait until the release of the payment set by both owner-operators and the shippers.

Normally, payment for invoices can extend up to 120 days and more. Operators have this “back up funds” to cope up with this, but most of them do not know about freight factoring which is an immediate source of a fund just in case they can’t have a backup fund.

Why Trucking and Freight Companies use Factoring?

As mentioned earlier, customers or shippers do not pay in full until the work is done by the company. Sometimes, when the shipping is already done, it still takes them longer before they send their payments. Larger shippers usually give upfronts and invoices which are not enough to cover the expenses of the freight company. This situation has been very detrimental to the trucking industry up until now. Luckily, alternative finance called freight factoring gave a solution to this problem.

What is Freight Factoring?

Freight factoring, also called as trucking factoring, sprouted to acknowledge the situation of freight companies and give solution to their management expenses. To keep the company rolling, freight factoring finance accepts invoices due within 90 days and turn them immediately into cash.

Typically, the factoring company gives two payments. For example, an advance 80-95% of the total invoices for the first payment and the remaining 5-20%(minus interest expense) second payment after the invoices are paid. The release of cash varies among factoring companies. They can also release cash from a hundred thousand up to millions depending on the credibility of the freight company.

Why Freight Factoring is necessary

• Freight businesses need quick cash to keep them working and taking on more work
• Factoring company typically approves within one business day of application which means fast cash for the freight companies
• It improves cash flows within the company
• Freight company can accept more loads and new customers without worrying where to get budget
• No more delays in deliveries
• The credit line can increase as long as the company meets the factoring criteria
• Factoring company allows invoices from new customers
• It can make the business grow. As they take on more work and more jobs they can continue to factor those invoices.

Types of Freight Factoring

There are two types of freight factoring: recourse factoring and non-recourse factoring. These two have differences that need to be studied before signing in a contract.

• Recourse factoring and non-recourse factoring are both beneficial for freight companies but thorough understanding must be done before signing in any contract.

How To Qualify For Freight Factoring

There are two factors on how to qualify for freight factoring: invoice and customer.

Terms of Invoice

Factoring is based on the value of the company’s invoices. In short, the cash to be received by the owner depends on the amount of the invoices minus the fees deducted by the factors. However, the factoring company determines the maximum limit of the invoice they can accept from the freight company, so it is better to know beforehand how much they can give. For small-owner operators, their invoices must be payable within 90 days.

For big-owner operators, their invoices must be paid within 120 days. Organized financial keeping is an advantage when applying. Documentation is also a major factor to qualify for freight factoring. Receipts, order information, and other documentation that can support invoices are necessary.

Trucking Customers Creditworthiness

Factoring companies conduct due diligence on the customers to see if the freight company is creditworthy or not. Remember, the factor company’s money only returns once the freight company’s customer pays the invoice. So, late-paying customers will most likely affect the approval of the application.

Always remember that factor companies always evaluate if the customers are good-paying or not before approving any contract. They have to be sure about who they are going to risk their money to.

Once the factor approves the company based on their research, both parties will sign a financing contract and agreement. Under the agreement are things such as the initial maximum amount that the owner can borrow, given time to pay the invoices, if recourse or non-recourse, and many more. Pre-Qualify Now

Manufacturing Industry Factoring

Types of Manufacturers that benefit from factoring

• Metal Fabrication and Manufacturing
• Food, Beverage and Tobacco manufacturing
• Wood, Paper and Printing Manufacturing
• Computer and Electronic Manufacturing
• Textiles, Leather, and Apparel.
• Wood, Paper, and Printing.
• Coal, Petroleum, Chemical, Rubber and Plastic Manufacturing,
• Nonmetallic Mineral.
• Fabricated Metal, Primary Metal and Machinery Manufacturing
• Computer and Electronic Manufacturing
• Packaging Manufacturing
• Pallet Manufacturing
• Furniture Manufacturing

What is Manufacturer Invoice Financing?

In manufacturer invoice factoring, cash flow and working capital issues are solved for businesses that operate with long payment terms anywhere between 30 to 120 days. With manufacturing invoice factoring, fulfilling the orders while taking on new ones is made possible for companies.

Unlike in having a business loan, the manufacturer invoice factoring comprises selling outstanding invoices to a factoring company, a third-party company. Thus, an advancement based on the value of the invoices with the customers paying the invoice back will be given.

In attaining business growth, the manufacturing industry needs to partner with invoice factoring companies for adaptable and flexible funding methods. Most manufactures or suppliers need to make a considerable investment on the front end in producing a finished product for manufacturing, distribution, and sales. As they begin to source and purchase raw materials, lease factory production space, buy large equipment and hire employees, they have to make investments at the very beginning before collecting payment received from selling the finished product.

With the manufacturers only receiving a share of profit from the goods that they produce, they often run on fairly slim margins at the end of the production-to-sales cycle. In this situation, the middlemen such as wholesalers and distributors move the manufactured goods for sale to the retail market. They take their cut then the final merchant or retailer takes their percentage after selling the product on their shelves.

Overall, in account receivables financing is where the capital is advanced for helping businesses be on the front end than have them wait for payment in the backend. Through invoice factoring, the upfront capital needed before collecting on money owed is received by the manufacturing company provided that they have a valid invoice to a customer with a good financial history.

Benefits of Invoice Factoring for Manufacturers

• Purchasing of raw materials in bulk with a discount
• Taking on larger projects they otherwise would not be able to cash flow.
• Hiring additional workers or covering the payroll, benefits, or other employment expenses
• Leasing more modern or technologically advanced manufacturing equipment for production capabilities
• Ramping up production for meeting an unexpected rise in product demand
• Improving cash flow and reinforcing overall business operations
• Credit qualification, factoring is determined by who you are invoicing if your customers cannot be factored you probably shouldn’t be extending terms to them in the first place.

How manufacturing companies can qualify for invoice factoring

Even when the invoice factoring is sometimes referred to as a factoring loan, it is still not considered as a loan. The truth is this is one of the few business financing forms that gives no debt to a business. Businesses can take advantage of invoice factoring to gain the working capital for business expansion and closing of deals even within a short period.

Different qualifications than most business loans

Invoice factoring may be a great option for you if your business requires quick cash for covering unexpected expenses, meeting payroll demands, or simply paying the bills. The qualifications for factoring are different from business loans. In business loans, the qualifications rely on the personal and/or business credit score as well as the quality of personal credit. It is much easier to deem fit for manufacturer invoice financing than credit or business loans. To qualify, manufacturers must remember the following:

Qualification criteria heavily weighed on the customers you are invoicing

• The customer’s credit quality is emphasized as it uses the receivables for collateral. With the creditworthiness of your customer, selling business-to-business (B2B) or business-to-government (B2G) is the approval for factoring. They are after the ones who can pay the invoice.
• Even with a brief revenue history for having a short time in the business, startups can still obtain factoring deals. The required minimum average monthly revenue by factoring firms is at least 3 months.

*Take note that the company must not have serious tax complications and must not be involved in legal disputes.

A solution for small, mid-sized manufacturing companies and even startup manufacturers.

Such requirements can allow many small, mid-sized manufacturing companies and even startups to qualify for manufacturer invoice factoring. Invoice financing makes an ideal substitute for manufacturing companies that have cash flow concerns and needs immediate funding due to their slow-paying customers. The manufacturing industry is geared towards growth in the months to come and opportunities should not be missed out due to cash flow clasp.Pre-Qualify Now

Food and Beverage Industry Factoring

• Beverage Manufacturers
• Bakery Manufacturers
• Dairy Product Manufacturers
• Seafood Manufacturers
• Nutritional Supplement Manufacturers
• Animal Food Manufacturers
• Meat Product Manufacturers

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