The Basics of Invoice Factoring
Invoice factoring is a type of financing available to business owners. Instead of getting a loan, however, you sell your unpaid invoices to a company (called a factor) at a discount in exchange for immediate working capital. With the money on hand, you can continue running and growing your business instead of dealing with cash flow crunches. If you’re looking at your financing options, here’s what you need to know about invoice factoring.
How Invoice Factoring Works
Unlike a business loan, invoice factoring doesn’t require you to accrue more debt. Instead, you sell your unpaid invoices to the factor in exchange for cash. There’s no waiting weeks or months for approval and funding.
You don’t receive the full value of your invoices upfront. The factor typically holds 5% to 30% until your customers pay. Then you get the rest minus the factor’s fees.
Recourse vs. Non-Recourse
With recourse factoring, you’re the one responsible for paying any unpaid invoices that your customers don’t pay. It’s less risky for factors, and therefore often comes with lower fees. Non-recourse factoring, on the other hand, means that the factor assumes the risk. If a customer doesn’t pay, the company writes the debt off. One thing to note here is that some companies may require you to repurchase the unpaid invoices.
Factoring vs. Financing
Invoice factoring and invoice financing are often confused with one another. While both involve your invoices, they are different. With factoring, you sell your invoices to a factor, and the company usually takes on the responsibility of collecting the debts. Invoice financing is a loan in which you use your invoices as collateral. Once your customers pay, you pay back the loan.
The Cost of Invoice Factoring
Like other financing companies, factors charge for their services. The most common cost you’ll pay is the discount rate, which typically ranges from 1% to 6% per month. The fee gets deducted from your reserve amount, which is the money the company holds back. The longer your customers take to pay, the more your factor deducts.
Other fees watch for when choosing a factoring company include:
- Application fees.
- Maintenance fees.
- Wire transfer fees.
- Early termination fees.
Run and Grow Your Business with Invoice Factoring
Invoice factoring provides you with an alternative to a conventional business loan that doesn’t require you to take on additional debt. The right factoring solution can help you to run and grow your business. Be sure to know your options and compare them closely so that you get the best fit.
