Invoice factoring is a financing solution where a business sells its open receivables to a factoring company in exchange for immediate cash. Instead of waiting for customer payment, invoice factoring provides you with immediate working capital so you can catch up on bills, meet payroll, maintain daily operating expenses, and grow your business with ease.
The process is very straightforward. A business provides work, services, or products to their customers. When the customer is billed, the unpaid invoice is sent to the factoring company first. The factoring company advances the business, a percentage of the value of the invoice, generally 90%, that same day.
The invoice is then sent on to the customer, who processes and pays it in their regular terms. The customer then pays the factor. Once the invoice payment has processed, the remaining balance of the invoice, less a factoring fee, is remitted to the business.
Invoice factoring supplies companies the immediate cash they need to not only operate their business but also to grow. Factoring is not a loan, so there is no debt created by it. The cash received from invoice factoring is based on the credit and payment history of a business’s customers, not that of the business itself. This is one of the many benefits of factoring for companies that might not qualify for traditional lending or don’t want to increase their debt.
Invoice factoring, also known as accounts receivable financing or receivable factoring, is a straightforward process. First, a business enters into an agreement with a factoring company. The business performs its work and creates an invoice as normal. Instead of sending the invoice to their customer, the invoices go to the factoring company. Once the factoring company purchases the invoice, it deposits an advance on the invoice total directly into the business’s bank account within 24 hours. Typically the advance is around 90 percent. Once the end customer pays the invoice, the factoring company pays the remaining balance, less a small fee.
At the foundation of a relationship with a factoring company is the factoring agreement. The agreement is the contract between the client and the factoring company. These typically include:
The term of the contract varies depending on your program. There are contracts written for three months, upwards of six months and others for multiple years. At TCI Business Capital, we even offer month-to-month contracts to meet our customers’ needs. Be sure to ask your potential factoring company questions and read through the contract thoroughly prior to signing.
Most agreements will include a volume commitment. By committing to factor a specific volume of invoices, a company can receive the maximum advances and lowest rates to optimize their cash needs.
In most cases, an invoice financing company, would advance you anywhere from 70 percent and up of the invoice amount. The amount advanced is based on variables such as your customers’ creditworthiness, pay trends, and volume. TCI Business Capital offers competitive advance rates. Inquire today to see how much we can advance you.
A factoring company’s fees vary based on items such as volume, the size of your invoices, your industry, customer pay trends, and other variables. Some factoring companies charge a flat fee for the service, whereas others may have a factoring fee and additional charges for other administrative and support services they provide. Be sure to read the fine print of your contract so you know exactly how much you’re being charged, and ask questions. To learn more about factoring fees, use the invoice factoring calculator.
There are many factoring companies in North America. Choosing the right factoring company is key to a successful factoring relationship. A factoring company should be able to meet the cash requirements of your business and offer services that add value to the factoring relationship.
Because invoice factoring has made its way into several industries, companies have divided themselves into either specialists or generalists.
A factoring company that provides financing to multiple industries is referred to as factoring generalist. In most cases, factoring generalists have a client portfolio spread over several industries with the majority of clients being smaller companies.
On the other hand, a factoring specialist usually finances invoices for a specific industry. For example, a factoring company may factor invoices for staffing, but the majority of their business comes from the trucking industry. Most times, the client portfolio is composed of small- to mid-sized companies that are predominantly in one industry.
Factoring companies are classified as either a recourse or non-recourse factoring company. It’s important to know the difference between the two when selecting one that works for your business.
Recourse factoring is the most common among factoring companies. With recourse factoring, factoring companies have the right to sell the invoice back to you if payment isn’t made within a time period specified in your agreement. Typically the time frame is 90 days or more.
Conversely, non-recourse factoring is not common in the accounts receivable financing industry. Several factoring companies advertise as non-recourse, but the contract’s fine print lists various reasons why an invoice can be exempt. If a factoring company is truly non-recourse, the factoring company takes on all credit risks for the collection of the invoices you sell it. As a result, you’ll pay much higher fees and experience more stringent credit reviews as compared to recourse factoring.
The need for cash is why most businesses enter into a factoring relationship. In addition to improved cash flow, a factoring company may offer value-added services which can strengthen the client’s business. Take a look at some of the value-added services we offer below.
Since 1994, TCI Business Capital has provided best-in-class factoring services to thousands of small to mid-sized companies across the United States. We offer reliable cash-flow solutions, enabling companies to meet the challenges they face and the opportunities they have available.
Our customers work on the front lines of North America’s growth sectors. They choose us for the working capital they need because our process is simple and straightforward.
Our easy to set-up factoring lines allow customers access to the working capital they need, quickly and easily. A factoring quote can be done in 15 minutes and funding within 24 hours. We distinguish ourselves from others through our get-it-done culture, reliability, flexibility, and award-winning customer service.
To apply for a custom factoring program fill out the form below or give us a call at 800-707-4845. In as little as 15 minutes, we’ll provide a free no-obligation consultation and quote for a custom factoring program to meet your business demands.