All too often small business owners run into that age-old problem of customers not paying on time. And even though you may be behind in your invoices, the business has to keep moving forward. You have bills to pay, products to crank out, employees to take care of. Things simply cannot come to a halt due to late payments. Regarding many small and medium-sized businesses, it was recently reported that 1 out of 10 invoices are not submitted on time. So, what do you do? How do you keep pace when you are out the money from past due invoices…This is where invoice factoring might be an option?
Understanding Invoice Factoring
Unlike handing over unpaid invoices to a collections agency, invoice factoring works a bit differently in that you are actually selling these invoices to a factoring company. In return, the factoring company gives you a percentage of all the funds you’re owed, and they basically get repaid once those overdue invoices are collected. This could be anywhere from 30 to 90 days.
So you don’t have to bring your business to a halt; you get the capital necessary to keep things going and the factoring company collects a fee for the amount advanced based upon the length of time it takes them to get the money back from clients. Keep in mind, this type of financial solution is only workable if you do in fact know that you will be paid these hitherto unaccounted for invoices.
On the part of the factoring company, they will carefully consider the likelihood of an invoice being paid. If there is a chance it may not, then they probably won’t gamble on forwarding your company the money for the invoices.
Before Selling Your Invoices…
Before jumping right into invoice factoring, there are several things you want to think about. First off, how old is an invoice? If it is over 90 days, the factoring company may not want to touch it. Those newer invoices (30-90 days past due/) tend to be more attractive for such companies. Meaning, there is a greater chance the client will ultimately pay up.
Also, you want to think about the actual status of the person/company who owes the invoice. Are they experiencing financial difficulties? Is it a small company who could very well be struggling just to make ends meet? Again, any potential red flags could turn a factoring company away.
And what about the size of the invoice. Odds are, smaller invoices will be paid sooner, while exceptionally large ones could take quite a bit of time.
The Process…
The factoring company takes a percentage of the invoice which can range from 2 to 5 percent. Once they purchase the invoice, you receive usually 90% of the total value. The factoring company will release the remaining balance minus their cut once the invoice is paid.
The longer the time extends that the invoice remains unpaid, the more you are charged. Generally, there is a monthly fee. And once the invoice is in fact paid in full you receive the full amount minus such fees.
What's the Difference Between Invoice Factoring and Invoice Financing?
Versus invoice factoring, invoice financing is when you borrow against all your outstanding invoices. In this case, though, it is your job to contact the customer and get them to pay their overdue bills.
The invoice financing company will give you a lump sum and you then go about the collection process. Upon receiving money from customers, you will proceed to pay back the advance along with any fees and interest associated. For this type of financing the fees are a bit lower—1-3 percent.
Here is an example to better show you the difference between each…Let’s say you’re a manufacturer who’s sold a retailer 10k worth of goods. Your invoice is due in thirty days, but you actually need the money sooner than that. With invoice factoring, you would thus sell this particular invoice to the factoring company. The factor contacts the client and keeps on them about paying their bill. When the client finally pays, they will submit to you the remaining balance minus their fees. All told, you receive anywhere from 90-95% of the value depending on how long it takes them to collect.
Now with an invoice financing agreement, you become responsible for client follow up and collection. Once you get paid you give this back to the factoring company and they will issue you the remaining balance minus fees.
So Should You Go This Route?
We’ve all been there at one time or another—short on cash, needing extra capital for whatever reason, and yet our clients are slow in remitting their payments. This can be very frustrating especially if you’ve earmarked that money for a specific purpose. And now your bottom line is affected because the customer just hasn’t made good on that invoice.
Pressing the client to pay you could hurt your working relationship. Then again, depending on how old the debt is, it may be worth risking that relationship if, in fact, that money is very slow in coming. Another option, of course, is invoice factoring.
With certain factoring companies, you may even be able to get your funds in as little as one day. Not to mention, you are no longer responsible for chasing after that client to get the money due you. They do the leg work, they keep on top of the invoice, and they, in turn, take their fee. Depending on the type of agreement in place (recourse versus non-recourse/), if the customer never pays, it could be the factoring company who takes the hit without your business being penalized. Carefully read any such agreement so you know exactly what is going on.
INVOICES THAT ARE OLDER THAN 90 DAYS CAN BE COLLECTED ON BY FIRST UNION LENDING. FEEL FREE TO INQUIRE.
Us at First Union love to give small business owners advice and funding if the business is in need of it. Call today to speak to one of our agents!