Using Invoice Factoring To Grow Your Business
Keywords: invoice factoring, accounts receivable factoring, working capital, cash flow, receivables funding
Invoice factoring can be utilized when you’ve refused a job or an order because your business didn’t have enough capital to purchase the supplies or hire the extra staff. You build a good reputation, have good workers and then when you finally get a nice big contract, you have to turn it down because all your money is tied up in accounts receivables. You know the bills will be paid, but they aren’t due quite yet so you are the one who suffers because of cash flow problems.
If you have customers who are established, are good credit risks and almost always pay on time, you can sell those invoices to an investor (a factor). Factoring will give you an advance of 70% to 90% when the invoice is issued and will wait for the bill to be paid. Then you will get the rest of the money minus a small fee of 2% to 4% per month. The advance and fee depend on monthly volume, size of invoice, credit, time it takes to be paid and other variables.
Some business people are under the impression that the advance of 70% to 90% is all they get. They are thrilled when they discover they get the rest when the bill is paid except for the small fee. So they actually get 96% to 98% of their invoice.
Factoring isn’t a loan, nor is it a credit line. There are no debts to pay back and you don’t have to tie up any assets other than the customer’s invoices. It only takes a few days to get approved and you keep complete control of your company.
Almost any business can use factoring, as long as they have invoices that are issued to another business. Even a business in Chapter 11 can have their receivables factored. Different factors have different requirements, minimums, maximums, fees, rates and applications to fill out. Some have a small application fee, many do not.
There are factors who work with any industry except construction and medical. There are others who specialize in construction contractors and others in medical receivables. These two have specific rules and regulations and risks and you definitely want a factor who specializes in them.
A good broker will be working with several factors and should be able to find the best factoring company for you. The broker will work for you, will get your questions answered and will be able to go to a second factor if the first one doesn’t fit your needs. The broker gets paid directly by the factor and your rates and fees are not affected.
Quite often business people think of using factoring as a last resort when their business is struggling and they are trying to survive. In reality, businesses should consider a factor when they are starting out, so they can keep their business growing. They should definitely use a factor when they are feeling confident about their business and are ready for growth.
Your customers will simply have a different address to send the payment to; they still do the work for you, get the invoice from you and have the same payment terms as they always do.
Just think how your business could grow if you were paid most of each invoice when you issue it: you could get discounts when you buy your supplies if you pay cash, you could do more marketing, hire more staff, buy more equipment, increase your own credit rating. Instead of focusing on collecting the payments you could concentrate on going after more contracts.
The next time a customer calls you with a big contract, you just have to get the papers signed and get on with the work. Sounds good, doesn’t it?
Kent Harlan has been a CPA since 1984 and is the owner of Ozarks Capital Funding, a Missouri-based company offering financing in the areas of accounts receivable factoring, equipment leasing, asset based lending, and financing for healthcare providers.
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