Like many businesses, yours can also have slow-paying clients and lots of outstanding invoices. Nonetheless, your cash flow need not be stuck up and your operation funds halted. One way to get you out of these troubles is invoice factoring. But what is invoice factoring? How does it work? Is it right for my business? This article will help you find out.
Invoice Factoring: Are You Eligible?
Unlike other common types of financing for businesses, invoice factoring does not base solely to the business’ revenue and credit score when it comes to determining eligibility. As a matter of fact, invoice factors look more on your clients’ creditworthiness since they are the ones paying the bills.
Invoice factoring is a great financing choice because it doesn’t require you to have years in the industry and a financial record to boot. Moreover, you don’t have to generate big sales and you can even apply even if you have a bad credit score. Having these qualities will almost instantly disqualify you from getting a traditional business loan, but not in invoice factoring. With this financing option, the chances of getting approved are greatly based on your account’s receivables.
Is Invoice Factoring Right for Your Business?
While most business can be eligible for this type of financing, the question here is, should you? Is invoice factoring right for your business? Factoring your invoices has a lot of advantages, but it is not for everyone. Here are some things to ask yourself to see if factoring is perfect for you.
1. Are my finances getting affected negatively because of my slow-paying clients?
Customers who are slow paying can greatly affect your business in many ways. For instance, not getting paid months after you have delivered your product or service may cause you to have trouble with the business expenses, such as buying inventory and supplies, covering overhead costs, and paying the staff.
With invoice factoring, companies like yours can guarantee they will have the working capital when they need it. Nevertheless, keep in mind that invoice factoring comes with a price.
2. Can I afford this type of financing?
Generally, fees for invoice factoring depend on your arrangement with the factoring firm. Rates usually range from 1% to 6% of the monthly invoice value. For example, you sell an invoice from a slow-paying client, which usually takes up months to pay, you may end up paying a great percentage of the invoice, but you get to have your money sooner. In addition to the factoring fee, you may be charged with servicing fees, money transfer fees, renewal fees, and monthly minimums.
Expect these fees to add up over time, unless your client pays up its invoice earlier than expected. All being said, the fees generally depend on several factors, including the creditworthiness of your client, the type of industry you are in, the number of invoices you are about to sell, and many other things. Check and weigh your options and decide if the fees are worth it.
3. Is there an alternative solution?
Even if it seems to be right for you, you must know that invoice factoring is not the only option. These days, businesses have more choices when it comes to financial solutions. You may see invoice factoring as the perfect choice that will solve your cash problems, but you may also consider other loan products available.
Financing loans like asset-backed credit lines are like invoice factoring but a bit more flexible. Also, they have lower rates, so you may want to consider it over factoring. Another option is the revolving lines of credit. With this type of financing, your line of credit replenishes as you repay your loan. Some revolving lines of credit need collateral to get approved, but some only requires a personal guarantee or a pledge of general business assets. With this financing option, you will have the money available whenever you need it. Moreover, repayment terms are flexible, and you can do it weekly, monthly, or bimonthly.
Knowing what invoice factoring is and how it works play a big role in your decision of whether it is right for you or not. This type of financing can definitely help solve your business funding problems due to slow-paying clients. It will also help ease you out of your financial troubles. If you think invoice factoring would be a good solution to your financing woes, then that will be great. Now it is time to look for a good factoring company that will match your conditions and needs.