A Quick Guide To Invoice Factoring for First-Timers
If you are looking to normalize your income while continuing to offer customers the convenience of invoice billing instead of a cash and carry system, factoring might just be the tool that you have been waiting for. It is a bit different from using debt financing for working capital because it does not involve taking out debt. Instead, you sell the right to collect on your invoices to the factor. Essentially, you’re selling the customer’s debt to you, for a little less than the face value.
Why Do Factors Buy Invoices?
This service and the profession associated with it date back to times when certain governments and religious bodies outlawed interest-based lending. Factors offered to buy future yields of harvests or to finance mercantile journeys in anticipation of their eventual cash yields, offering a percentage of the estimated value upfront for a fee to be paid out of the windfall. Invoice factoring works in a similar way, and factors buy invoices because the profit to them is in the gap between what they pay and the face value they collect.
How Do Applications for Work When You Factor Invoices?
Since you are not taking out debt, your credit score does not matter, but information about your business to substantiate its operations will be important. That means business license information, tax ID number, possibly confirmation of your liability insurance coverage, and of course your invoices. Factors also want to review your payment records in the form of both your receivables history and bank statements showing receipt of payment. This lets them calculate the risk of a debt taking too long to collect and becoming unprofitable.
That risk is what determines how costly the whole operation is to your company. The lower the risk your customers represent, the less expensive factoring will be. If you plan on using the service regularly, grooming your clientele list to cut off customers who regularly default will be essential to keeping costs down. You’ll also want to factor often to avoid having old invoices on your books. The older an invoice is, the lower the value it brings you.
How Long Does Factoring Take for First-Timers?
Working with a factor is never a slow process when you compare it to something like a traditional bank loan. When you have an ongoing relationship with a company who knows your client base, you might even be able to turn it around in 48 hours with a small batch of invoices. For your first application, you should plan on three to five days for approval details to get worked out, then another day or two before cash hits your account. That’s how quickly you could get your income normalized if you decide to work with a factor.