Invoice Factoring for Beginners

We’re all only human. And somewhere along the line someone noticed that in most situations a person’s natural impulse is to seek pleasure and avoid pain.

That’s often the case when it comes to running your company. It’s easier to wait for the phone to ring than it is to pick it up and make a cold call, right? It’s also easier to keep buying from the same supplier – even when you have a hunch you’re not getting a great deal – than it is to research new vendors.

Finding funding and operating capital for your company is usually no picnic, either. Banking relationships are particularly stressful. You fill out forms, you answer dozens of questions, you write and re-write a business plan, you provide supporting documentation…and then you wait. That’s painful.

Then you realize that there’s at least a 50% chance you’re going to be turned down. And that’s really painful.

Invoice Factoring

Fortunately, for those of us firmly in the pain-avoiding category, there are other options for business funding. Invoice factoring (or receivables factoring) is an easy, fast, economical way of getting the working capital your company needs to run smoothly.

In a factoring transaction, your company sells an invoice to a third party (called a factor, like MP Star Financial) in exchange for almost immediate (usually within one or two business days) payment.

Arranging your first factoring transaction may not be 100% pain-free, but it comes close. Here’s what you need to know to get started.

How Invoice Factoring Works

Factoring is considered a type of asset-based funding, but is different from most banking arrangements. That’s because the funds you receive are secured by the expected payments from your customers on the invoices or receivables. MP Star Financial advances funds to your company based on the amount of the receivables. The remainder of the outstanding invoices, less factoring fees, is forwarded to your company when the balance is paid.

Here’s how it works:

1.   Your company assigns or sells an outstanding invoice to MP Star Financial.

2.   MP Star Financial gives you a cash advance (based on a pre-determined percentage) for the invoice. Advance rates vary, but 85 to 90% is possible.

3.   Your company has working capital to pay its usual day-to-day obligations (payroll, suppliers, utilities, etc.).

4.   Your customer pays the invoice to MP Star Financial (typically 45 to 60 days later).

5. MP Star Financial pays you the balance of the invoice, less administrative fees, which are clearly spelled out at the beginning of the transaction.

Invoice Factoring’s Biggest Advantage

Actually, there are two.

First, there’s the speed of factoring transactions. There’s no waiting around for weeks for approval, as you probably would in a traditional banking setting. Your company provides some basic information and completes a minimal amount of paperwork, and then you’re set up. That can usually all be finished in four or five days. And the news gets even better when it comes to the actually transactions – you usually receive funds from your invoices, generally via bank wire transfer – in one or two business days.

Factoring’s other big advantage involves business credit. If your company is new and hasn’t established a credit history, or if you’ve had previous problems with late payments, there’s still a very good chance MP Star Financial can help. That’s because it’s the credit and payment history of your customer that determine the eligibility and terms of the transaction. This makes factoring a great choice for many growing businesses.

Other Advantages of Factoring

Besides the speed of the transactions and the absence of credit issues for your company, factoring offers a few other significant advantages to companies like yours.

• Factoring finance adds no debt to your balance sheet. And who needs more debt? (That’s just more pain.) You’re not borrowing money from MP Star, you’re just getting access to your money earlier than you would otherwise.

• Factoring improves your company’s cash flow. Knowing exactly when funds are coming in makes it easier to manage your cash flow matters effectively and allows you to make better decisions regarding running and growing your company.

• Factoring simplifies your receivables and collections process. Receivables – and collection activities, when necessary – are handled by MP Star. This lets you concentrate on more productive areas of your business.

Getting Started

Ready to learn more about getting started with an invoice factoring program? MP Star Financial has helped companies like yours for more than 20 years, so we’re prepared to answer all your business funding questions.

Email us, or call (800) 833-3765, Ext. 150

You can also find more information on factoring and our other asset-based funding services on our website.

MP Star Financial’s invoice factoring services can help ensure you have cash flow needed to effectively run your company. Call MP Star Financial for more information at (800) 833-3765, extension 150 or fill in our online factoring application.