Easy to Embed Copy/Paste the code.
It’s nice to receive a customer invoice and know that you’re going to get paid eventually, but wouldn’t it be better if you could turn that invoice into immediate cash you could use right now? After all, you have employees, bills, and business expenses to pay.
Invoice factoring is a valuable solution to this common funding problem. If you’ve ever wondered whether or not this cash flow strategy would work for you and your business, keep reading!
Invoice factoring is when a business sells their invoices (also called accounts receivable) that are due and payable to a third-party firm. This third-party firm is called the “factor,” and they pay businesses quick cash for invoices with future due dates in exchange for a fee.
In other words, invoice factoring allows businesses to receive an advance on the amount they’re owed from their customers. This allows that business to meet their immediate financial obligations, and to grow to their full potential.
Invoice factoring is a flexible, low-risk solution for businesses with cash flow management problems. However, it’s important to understand all of the nitty gritty details about factoring before you get started. We’ll dive into the important details you need to know below.
Many businesses rely on invoice factoring to meet their cash flow needs. Not only does factoring solve a real, critical problem for companies and organizations, but it has many additional benefits that other funding options (such as loans) do not offer.
There’s really no limit to the types of organizations that can benefit from invoice factoring. From janitorial businesses to temporary staffing agencies, and from security services to light manufacturing companies, there are several unique (and very valuable) benefits created by invoice factoring that other funding sources just can’t match.
With invoice factoring (also known as accounts receivable factoring):
One of the biggest benefits of invoice factoring is that you can receive cash right when you need it, without having to wait for your customers to pay their invoices. Invoice factoring allows businesses to have real cash in their hands within as little as 1 or 2 days, rather than waiting the standard 30, 60, or even 90 days.
Due to unpaid invoices, many small businesses find themselves struggling to pay their employees and cover their daily business expenses, such as rent and utilities. With invoice factoring, you can stop waiting for cash (potentially jeopardizing your business in the process) and start using your money sooner.
Those invoices that you’re used to just hanging on to? Those could be converted into useable funds immediately! That money is working capital that you can use however you’d like, to benefit your business.
It can be a huge pain and waste of time to follow up with slow-paying customers to make sure you receive the money you’re owed. When you acquire funding through invoice factoring, you get the money you’re owed right away, regardless of how quickly your customers pay you.
Invoice factoring allows you to stop stressing about those 60-day invoices, because you know you’ll get your money long before your customers pay up.
Tracking down your customer payments and ensuring that invoices are being paid in a timely manner is no easy task.
Invoice factoring companies like MP Star can help you manage and collect your accounts receivable with their customer-service knowledge and by monitoring your accounts receivable on a regular basis.
You’ll still be the one reaching out to your customers (giving you control of the process), but you’ll have a team of experts supporting you from behind the scenes.
What would it mean for your business if you could receive all of the money that your customers owed you today? Not only would you have the funds you need to take care of required expenses like employee paychecks, but you’d have the freedom and flexibility to invest in your business in other ways.
Invoice factoring gives businesses the money they need – when they need it, to upgrade equipment, hire new personnel, and pursue new business ventures with confidence.
Factors like MP Star Financial don’t extend credit to their clients (i.e. the businesses seeking the factoring services), but actually to their clients’ customers.
That means that even if a business can’t qualify for a loan, they can still use factoring as a means for acquiring faster funding. Invoice factoring comes without all of the risks and complications of traditional bank loans, and adds no liability to your business’s balance sheet. It’s also less pricey than many other short-term funding options, like merchant cash advances.
Before you get started with invoice factoring, it’s important to have a very solid understanding of the terminology.
Here are the top invoice factoring terms you’ll want to get comfortable with:
- Invoice: An agreement to pay money for goods or services. An invoice tells you what your customers owe you for the products or services you provided to them.
- Account receivable: An invoice plus supporting documentation as proof of service, delivery and/or acceptance on the part of the customer. NOTE: An invoice has no value unless there is some sort of approval by the customer that makes it an accounts receivable. Documentation may include proof of delivery, time cards, acceptance signature, etc.
- Factor: The firm who pays you for your invoices. For example, MP Star Financial is a factor.
- Advance rate (or advance percentage): The percentage of the invoice that is actually advanced to the client on each invoice. For example, if the advance request is for $10,000 and the advance rate is 80%, then the amount advanced would be $8,000 minus the initial fee.
- Initial fee (or discount fee): The fixed percent charged by the factor on each invoice for the designated period.
- Reserve: The amount of the account receivable that is not advanced to the client, and is held in escrow until the account receivable is paid in full.
Keeping these important terms in mind, let’s walk through the full process for how businesses can get started with invoice factoring and start receiving payments for their outstanding invoices.
Invoice factoring isn’t overly complicated, but it’s good to know what’s involved before trying to decide whether it’s the right funding option for your business.
From partnering up with a factoring company to receiving your funding, here are the 10 crucial steps you need to know about.
Before you can get started factoring your invoices and receiving quick payments, you have to enter into an agreement with a factoring company.
It’s important to look out for any red flags that may indicate the factor doesn’t have your business’s best interests at heart before you sign an agreement, including:
- Hidden fees
- Application fees
- Minimum monthly funding requirements
- Long-term contracts
- Sneaky invoice factoring tricks
Once you’ve partnered up with a factoring company, that factor will notify your customers that they will now be sending payments to the factor’s address.
All future payments by your customer will go directly to the factor, as you’ll receive your payment from the factor before the customer pays.
Now, it’s business as usual. You continue to generate sales and earn business from your customers. Nothing changes here at all!
Each time one of your customers agrees to purchase goods or services from your business, it’s up to you to deliver those products or services. Again, nothing has changed from the way you typically conduct business.
Once your product or service has been delivered to the customer, an invoice must be generated. This invoice tells you how much your customer owes you.
Without invoice factoring, you would wait for your customer to pay you within the agreed-upon timeframe, typically 30-60 days.
With invoice factoring, your factoring company has purchased the right to collect on your customer’s invoice. In exchange, they’ll pay you immediately for the face value of that invoice (minus a fee). So, it’s important that you keep track of these invoices throughout the whole process.
Step 6: Combining your invoices with supporting documentation creates an accounts receivable that is collectable and can be factored.
It’s important to keep track of all of your invoices and any supporting documentation, as your factoring company will need these in order to factor your invoices (and pay you for them).
Without supporting documentation such as signed proof of delivery, factors can’t pay you for your outstanding invoices.
When you request an advance on your invoices from your factoring company, they will pay you a percentage of the invoice’s face value immediately, typically between 75% and 80%. The remainder of the invoice (minus the fee) will be paid to you by the factor once the customer pays them.
At this point, waiting around for customer invoices is now a thing of the past – your customers will pay the factor by the invoice due date, and the factor will pay you whenever you need to get paid. It’s as simple as that!
Since you’ve already been paid by the factor, it’s now time for the factor to collect payment from your customers. In some cases you don’t need to worry about this part at all – it’s up to the factor to collect their payment.
With some factoring companies (like MP Star), you’ll retain responsibility for collecting customer payments. After all, you have the closer relationship with your customers, and many businesses prefer to remain the point of contact between their customers and the factor.
After the 30, 60, or 90 days have passed (whichever timeframe was noted on the invoice), your customers will pay the factoring company directly.
Once your customer has paid the factor, the invoice advance has been paid off.
Step 10: The factor pays you the remainder of the advance request.
Once your factor has received payment from your customer, they will pay you the remaining balance of that invoice, minus the agreed-upon fee.
At this stage, you have received payment from the factor as quickly as you needed it, your customer has paid off their outstanding invoice, and the factor has collected a fee in exchange for their services. The process is complete!
Let’s review this real-life example.
Still not sure if invoice factoring makes sense as a funding solution for your business? We’ve broken down the above steps into a real-life example that may shine some more light on the whole process:
The bottom line: invoice factoring is fast, flexible, and helps businesses acquire the funding they need to succeed.
The experts at MP Star Financial have successfully funded more than 1,000 growing companies since 1995. Needless to say, we know a thing or two about how invoice factoring works, and we’ve seen the success businesses have had using our services.
If you’re still not sure whether or not invoice factoring is the cash flow management solution your business needs, leave us a comment below or send us a message, and we’ll do our best to help clear things up for you.
Do you need help solving cash flow management problems, so you can expand your business? If so, consider invoice factoring! Contact MP Star Financial today to get started.
See how invoice factoring can work for you
Emma Blyth – Senior case manager at ForbesBurton.com“With Invoice Financing you can boost your cash flow by raising a lump sum of capital which can be immediately to be reinvested into your business. As you raise your sales invoices and send them to your clients you also provide a copy to your invoice finance provider. They will then make a payment to you of up to 90% of the invoice value straight away. The balance, less charges, is paid when your client settles the invoice. Another great benefit is you don’t need to chase the client for payment, the invoice finance provider will do it for you.”
- Dave Jones from Brightbolts.com
“Shortening the invoice to cash cycle is a great way to improve working capital. Before considering invoice factoring, I would speak with customers and explore what can be done to speed this up without the need to give away any of your profits to a third-party.If this fails and your cash flow situation is dire, you would need to look at the time-value (or present value) of money. How much is the money worth to you now in comparison to receiving it in 90 days etc… How do the fees charged by the factoring company compare to a loan or even the offer of a discount for early payment to your customer.”
Michael Cohen from www.companyformations247.co.uk“One of my colleagues has used Invoice Factoring in a SME before so he has first-hand experience of it. This is what he said:“When I was working in the book retailing business we were trying to expand by starting our own publishing house and simultaneously grow the retail side. We had maximised the funding from traditional lending sources – ie bank loans, government loans and other grants and overdraft facilities available at the time. The owner did not want equity finance as he did not want to dilute his stake in the business.We used Invoice Factoring to provide additional and immediate finance for the business. It was the only source available to us to satisfy our need for additional funding at the time and release a large percentage of our debtor book to facilitate growth. The only downside was that the Accounts Receivable department had additional administration and accounting to deal with. It caused occasional problems with customers regarding who they had settled their account with – us or the factoring company. Copy invoices needed to be sent to the Factors and the account with them reconciled and managed.To summarize, the finance facility was just what we needed, but the additional administration in managing the ongoing relationship with the factoring company and the control of sales ledger accounts was somewhat underestimated.”
- Natalia Campana from Freelancermap.com
e factoring is a very interesting financial method for small and medium-sized enterprises in need of liquidity. But before implementing this alternative, make sure you understand all conditions in the agreement with the third party. Search for different service providers and compare the conditions that will apply. It’s a quite competitive market, so there will be a lot of offers to choose from. We would also recommend letting the clients know about the decision of using this method, so they are prepared if a third party calls them. This is important to avoid a potential damage in your business relationship.”
Edema Ero from Wanentrepreneur.com“Invoice factory is especially helpful to those who have a lack of credit or have poor credit due to only being open for a short period time. If you are the type of person that don’t just want to take another debt, then invoice factoring will be an effective solution with added benefits like professional collection services and off course a regular increase in cash flow.
Tips for Better Invoicing;
- Not every client will flow smoothly just the way you want. In your business, you are going to encounter slow-paying clients.
- No matter the pressure you put on them to pay faster, the ultimate decision is made by the client.
- Truth be told, you can never force a client to pay faster.
But still there are things you can actually do to encourage faster payment from your client.
1. Offer multiple payment channels
2. Reduce payment terms
3. Add a personalized “thank you” message
4. Make it clear you are issuing an Invoice
5. Make sure you Send the invoice to the right person with the right information.
6. With regards to implementing overdue fees make them very clear. You do not want misunderstanding.
7. Lastly the invoice should be precise and concise. ”
- Business Writer at Acadocea.com
“Are there advantages to using invoice factoring? Certainly, particularly if you’re a small business or have poor credit having only opened your doors recently. In these cases, you may find it difficult to take out a loan from a back. In this case invoice factoring is an highly effective solution that has the added benefit of professional collection services and a regular increase in your cash flow.Here are some tips we’d highlight for implementing invoice factoring:
- Don’t get locked into a long-term invoice factoring contract.
- Be wary of come-on introductory rates.
- Understand exactly when your customers’ checks are being applied to your open invoices.
- Go with an accounts receivable factor company that uses a bank lockbox as opposed to a private lockbox
- Keep a copy of your contract along with any addendums in a safe place.
- Make sure your factor offers secure 24/7 on-line reporting.
- Always get a monthly report of all transactions.
- When searching for your invoice factoring company, ask for references and follow up on them.
- Watch your aging receivables carefully and keep after your collections.”