Successful invoice factoring is based on a simple process, yet it delivers considerable benefits. Small and medium-sized business owners and managers factor their sales invoices so they can focus on growth, on looking after their customers well, and on keeping their working capital at desired levels. These benefits all flow from one simple process. These 10 things will give you a good introduction to the invoice factoring process, benefits, and obvious requirements.
1) The Factoring Process
Factoring is based on a business selling its future sales revenue, at a small discount, in exchange for immediate payment.
2) The Basic Requirements
You must operate a business with commercial or government customers, your customers must have good credit, your profit margins should be above a minimum percentage, and your own senior staff must pass a simple background check.
3) No Sales Invoice Encumbrances
Your invoices must be available. Invoices already pledged to another institution, such as your bank, which may have encumbered all assets as part of an overdraft facility provision, will not be available for factoring.
4) Factoring’s Primary Benefit
Invoice factoring improves your business’s cash flow, because it enables invoices to be paid quickly. Your customers may, typically, pay in 30, 60 or 90 days. Factoring will put cash in your bank account, so customer payment lead times cease to be your responsibility.
5) Factoring is Easier Than Getting a Loan
Arranging a business loan can be time-consuming, may require stringent credit history qualifications, and may establish certain limiting conditions on your business operation. You may also have to wait until a recent audit is completed in order to satisfy lender credit-worthiness requirements. Factoring is quick to arrange and much easier to put in place. You are not applying for a loan, you are selling your unpaid sales invoices for a cash amount.
6) Factoring is Cheaper Than Getting a Loan
Factoring does not require you to pay an up-front processing fee, high interest rates or late fees for non-payment, and there is no fine or additional payment charge in the small print to trip you up.
7) Factoring Is Flexible Not Time-Bound
You are not required to sign a long-term factoring agreement, to make a fixed commitment or to make long-term decisions that may require a crystal ball.
8) Factoring Is Flexible Not Figure-Specific
You can increase or decrease the number of invoices you factor out. Your working capital needs may vary. You can, therefore, vary which invoices from which customers you hold onto until your customer pays you direct, and which you factor. This feature not only makes factoring responsive to your needs, but it avoids you having to renegotiate a credit limit or business loan with a traditional lender to cover unexpected demands on your working capital.
9) Factoring Can Be Fail Safe
You may choose whether to have a recourse or a non-recourse factoring invoice agreement. If you take a non-recourse agreement, any invoice that one of your customers fails to pay is not returned to you, so you are not responsible for that bad debt.
10) Factoring Lets You Focus on Your Business
You are in business to make money. You do that by adding to your customer base, by selling more products and services to that growing customer base, and by minimizing costs. A traditional loan carries certain financial responsibilities which you must manage. With a traditional ‘customer-pays-you-direct’ way of doing business you have to chase late-paying or non-paying customers. You may also have to prepare another package to discuss with your bank’s loan officer. Factoring invoices takes all of those time-consuming activities off your desk, and it leaves you free to focus on your marketing, selling and production activities.