Factoring is one of the most efficient ways to boost your cash flow. Many businesses can struggle to meet payroll and other expenses when payments are coming in up to 90 days later. As a result, businesses turn to invoice factoring for help but it’s important to fully understand what your contract entails. This article will explore what invoice factoring is and if it’s a viable solution for your business needs.
What is factoring?
Factoring has been around for decades and is a widely used alternative financing solution that provides businesses with the opportunity to grow, recover from insolvency, or help them maintain their businesses more efficiently.
How does invoice factoring work?
Businesses sell their open invoices to a factoring company for a lump sum of cash they receive immediately. The company pays an advance of up to 98% of the invoice amount upfront and then go on to collect the invoice from the customer. When the invoice has been paid off, the factoring company returns any leftover holdback minus their factoring fees.
Costs associated with invoice factoring
The cost of factoring for your invoices depends on the company you work with. Each factoring company has their own fee structure including flat rates or variable rates, factoring discounts, and other fees that you should consider. Some fees that you can expect to be seeing on your agreement include:
Origination fee: This fee is usually around 1% and is paid upfront prior to the activation of your factoring agreement. Some factors don’t charge this fee at all, and you can often expect to receive this amount back via the funds that are obtained once the agreement starts.
Factoring fees: These are the face value fees you pay on your invoices. They typically range anywhere from 1.15% to 3.5% flat.
Funding fees: Some factors charge nominal fees for every batch or invoice that is processed. These can be a few dollars or basis points.
Termination fee: Termination fees can fluctuate from 3% to 15% of your overall credit facility, depending on the provider. This fee is only charged if you terminate the agreement prematurely. Some factors don’t charge this fee at all.
Doing your research to find the right factoring company for your business is crucial. While factoring can help provide your company with the cash you need upfront, making sure you’re finding a company that fits your business values is important too. Remember that the cheapest rate doesn’t mean you’ll be getting the best service too.
What factoring can offer your company
If you’re considering factoring for your trucking company, you should note the following benefits:
Factoring offers immediate funding for your business without needing to wait up to 90 days for payments. This allows you to have a sufficient cash flow, allowing you to keep your business operating smoothly.
While it might not provide a direct boost to your credit, it does increase your cash flow which helps you stay on top of your bills and payments too. Over time, this can steadily increase your score and help build credibility.
Many factoring companies provide businesses with additional administrative support needed to collect payments, such as credit checks on your customers and help with billing; back-office tasks you’d additionally have to pay for.
With an increase in cash flow, you have more capital to continue expanding your business. This means you can take advantage of new equipment, growth opportunities, and invest more in marketing efforts.
Explore your factoring options
Factoring is one of the most flexible financing options available to businesses. It allows you to keep your business growing with a steady and consistent cash flow without having to waste your time collecting payments from clients. Be sure to explore different factoring companies and see whether they would be a good fit based on your invoices and their fee structure.
Factoring rates generally range between 1-3% of your invoice, but fees can vary by company. Many factors offer client consultations which is a great opportunity to ask any questions you have related to their fee structure.
Businesses should consider utilizing invoice factoring when they need funding to meet payroll, keep on top of bills, want to expand their business, or any other time they want to increase their cashflow.
This will depend on which factoring company you choose to work with. Most factoring companies will ask that you factor all of the invoices from the same customer. Other factors may ask that you factor every invoice from all your customers with them.
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