Invoice factoring can be an interesting way for companies with overdue accounts receivable to easily collect the necessary cash. Factoring businesses can buy blocks of unpaid invoices from a corporation, accounting for between 85 and 90% of the overall value. Invoice factoring frees up cash otherwise unavailable. But is this process right for you?
We’re going to go through a few pros and cons and decide whether or not invoice factoring is a successful match.
Get the quick cash When You Need it
Unlike a regular loan that can take weeks to months to process, companies can easily turn their outstanding invoices to cash, frequently within a day or two. Instead of having to wait 30, 60 or 90 days for your clients to comply with their invoices on your terms, you will collect the money directly.
Approval is reasonably simple
Your creditworthiness is not a concern when you apply for invoice factoring. That’s how the clients will be paying back the “loan” as they pay their invoices, not you. This feature makes factoring perfect for companies with troubled credit history.
You can factor repeatedly
You are not limited to a single factoring transaction. As long as the clients are in good faith and you keep invoices coming in, you can count as many as you want. Many organizations develop a working partnership with a factoring firm and actively use the service to keep their cash flow balanced.
Allows you to give more flexible terms to consumers
Businesses who frequently face cash flow problems may not be able to offer flexible credit terms to their clients. With invoice factoring, you can automatically turn invoices to cash, which means that you can increase the period your consumers have to pay you without negatively impacting cash balances.
You can offload the Invoice Collection Responsibilities
Factored invoices are obtained by the factoring company, which ensures that you don’t have to worry about it. And if you enter into a non-recourse factoring contract, the factoring firm assumes the credit risk of your client. Non-recourse agreements charge higher premiums, but the rewards can be worth it.
It could be costly
Fees will vary from 1 to 5% of the overall invoice sums, partly based on how easily the customers pay the factoring firm. Both payments are higher than what you would normally have paid on a line of credit. However, the ease of acceptance also compensates for the extra cost.
You will also be responsible for bad debts
Unlike the non-recourse factoring agreements described above, recourse factoring does not take responsibility for receiving money from clients who do not pay. Suppose you don’t pay an invoice that you deliver to a factoring firm. In that case, you will be liable either for returning the money to the factoring company or for sending a new invoice of equivalent value.
If the customers don’t pay, you won’t qualify
Your creditworthiness is not a big issue when applying for factoring, but it is the creditworthiness of your client. A factoring firm will expect you to look at your customer’s payment history, because if you are paying late on a daily basis, you will be less likely to apply for invoice factoring.
The Factoring Firm will be in touch with your clients.
When you sell invoices to a factoring firm, your buyers will be called to let them know where payment is to be made. They can even contact with them if payments are too late.
You can’t collect invoices if you don’t have them
If sales are down, you could get a loan to make the business float until things change. You can’t do it with invoice factoring, since low sales mean low invoice amounts, and without invoices, you don’t have anything to factor.