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Invoice Factoring Basics

Every company needs cash on hand to meet their monthly obligations. Rent, utilities, vendors, and payroll expenses must be met regularly, or the business will quickly be drowning in red ink. Meeting these obligations can be challenging, particularly when your accounts receivable income is not keeping up with your accounts payable. This is when it may be a good idea to consider invoice factoring.

What is Invoice Factoring?

Invoice factoring is one of the oldest funding methods in the business world. In effect, factoring is the sale of your accounts receivable (invoices) at a discount, to a factoring company (factor). The factoring company pays you a portion of the amount of the invoice, and then they take on the responsibility of waiting for the payment from your customer. You can think of the transaction as a type of cash advance for your business since you are receiving payment on your invoices sooner than they are due.

Since your customer is responsible for paying their invoice to the factoring company, this is considered repayment for the funding you received. Therefore, your balance sheet remains strong, and invoice factoring does not impact your company’s credit score.

How Does Invoice Factoring Work?

Business owners need regular cash flow and are not always able to wait for a customer to pay an invoice, so they develop a relationship with a factoring company. The factoring company will issue a proposal based on several key factors including your industry, the volume of invoices you intend to factor, the length of time until the invoices are due to be paid, and the credit strength of your customers.

Once you have issued an invoice to your customer, you can immediately submit that invoice to your factor, who will fund a portion of the amount invoiced directly to your bank account. The factoring company advances you a portion of the invoice based on various factors including:

  • Amount of the invoice
  • Credit-worthiness of the customer
  • Industry of the customer
  • Days until the invoice is payable

Once you have sold the invoice, your customer will then pay the amount due to the factoring company. The factor will assist you in managing your accounts receivable portfolio, freeing up time to continue operating your business and working on developing new customers.

Why Should I Consider Invoice Factoring?

The best reason to consider invoice factoring is because your company will have consistent access to funding, while not accruing additional debt. Let’s discuss the other reasons why invoice factoring can benefit your company in the long run.

You will have much quicker access to funding with invoice factoring than you would if you applied for a bank loan. While banks can take several weeks to approve a loan, you can often get approval from a factoring company within just a couple of days.

With any type of loan or line of credit, there is always a maximum amount you can borrow, and requesting a credit line increase can take weeks to approve. With invoice factoring, the amount of funding you can receive is based on your revenue and accounts receivable. Invoice factoring is a great option for startups, companies that are in a growth pattern, or those that receive a large order or contract that they can’t fulfill without some additional cash. If you experience an increase in sales, you can expect that your factor would be more than willing to fund the additional invoices.

Unlike working with a bank, you will not have limitations on how you can use the funds. Most bank loans are for a specific purpose, which means the bank will dictate and monitor how the funds may be spent. When you use invoice factoring, there are no restrictions on your funds, other than they must be used for business purposes. You can use them in any manner you deem necessary for your company, which includes payroll, taxes, materials, loan payments, equipment, or construction of a new building.

Another option companies utilize when they need capital is a venture capital company, or equity lending. In these cases, the lender requires an equity position in your company and may also want a “say” in how your company is operated. Invoice factoring allows you to get access to the capital you need without giving up any equity or voice in your company.

Traditional lenders often have requirements that make it more difficult for certain companies to qualify for loans or credit lines. Specifically, service-based industries, such as staffing companies, find it challenging to find a bank who will help them with the financing they need because they lack the fixed assets necessary for collateral. Startup companies also experience difficulties securing funding, mainly because they lack credit and financial history. Factoring companies have more flexible criteria because they are relying on your customers to repay the invoice (something that’s already part of your daily operations), so it’s often much easier to obtain approval and secure the capital you need from a factor.

Finally, you can save money with factoring. While you do pay a fee to the factoring company, you will gain the benefit of negotiating better terms with your vendors if you can lower your payment terms with them. For example, instead of paying their invoices on Net 30 terms, you can offer to pay cash or Net 15, which could mean you get a bigger discount from your vendors since they would be getting their money early. This could mean you are actually offsetting most of the costs of factoring your invoices.

Why Chose Evergreen Funding for Invoice Factoring?

Real people addressing real problems. That is what you will find when you work with Evergreen Funding. We have many combined years of factoring, commercial and consumer lending, as well as business ownership and consulting. We never assume that factoring is the right answer for every client who approaches us needing solutions to their cash flow problems. Instead, we will carefully evaluate your funding needs, your business model, and your current cash flow to help you find a solution that works best for you. Our goal is to help you sustain and grow your business and if that means we have to refer you to another source for financing, that is what we will do.

We also understand how valuable your time is. We will get to work immediately evaluating your company and your accounts receivable, and issue you a proposal within just a couple of hours. Once your company has been evaluated and approved, we will draw up your contract which will clearly spell out the terms of our agreement and all the fees associated with factoring your invoices, so you do not have any surprises later.

After you start factoring with us, we review your account regularly to see if you are eligible for certain benefits or revisions to your program, such as higher credit lines or fee reductions, based on invoice volume, payments received, and other factors. We understand how important communication is as well, so you can count on us to be readily available to answer any questions regarding your account.

If you are interested in learning more about invoice factoring, please feel free to give us a call at 888-344-7522, or submit your contact information online and one of our team members will contact you.