How does Invoice Factoring work?

Invoice Factoring is a way of ensuring you’re paid early, rather than just on time, every time you invoice. Rather than wait for your customers to pay (anything from 30 - 120 days depending on the payment terms) you can access your funds usually within 24 hours of issuing your invoices.

So how does it work? Invoice factoring can be beneficial to businesses operating in a wide variety of circumstances. For example, you can be considered for invoice factoring services if you’re a new business with relatively little financial history, an organisation seeking cash to fund expansion, or you might need access to cash faster to pay employees and your suppliers.

Even if there’s a bankruptcy in the background, a factoring service will still consider your application if you can demonstrate creditworthy customers and a sound business strategy. This avenue is not always available to you through traditional bank funding.

You can access factoring services if your customers are creditworthy and you meet the specific criteria of the particular factoring provider. It’s important to read the small print when you apply. Not all factoring providers offer the same terms, or the same services.

What does factoring involve?

A factoring service pays you an agreed percentage of your invoice while they wait to be paid by your customer. The great thing is that as your business grows, and you increase the number of invoices issued, so the amount of accessible cash grows, meaning you can continue to pay for business expenses, new assets and pay wages, without needing to renegotiate terms with the factoring company.

Renegotiating bank finance can take longer to arrange, meaning you might have to miss opportunities while you wait for decisions to be made. Factoring providers work much faster, often making decisions within days of you approaching them with the information and documents they need.

A factoring organisation tends to work this way.

When you’ve agreed terms between you and the factoring company, you can typically receive between 80 to 95 percent of the invoice up front, within 24 hours of the invoice being issued. The remainder of the invoice, less the factor’s fee, is paid as soon as the invoice is paid by the customer.

To summarise:

1. The terms of business are agreed between you and the factoring organisation
2. You issue your invoice to your customer and send the factor a copy
3. You receive 80 to 95 percent of the value of the invoice within 24 hours
4. The factor receives payment of the invoice within the designated time period – 30-120 days
5. The factoring company pays you the remainder of the invoice, less their percentage
6. Many factoring companies help keep you on track with your payments using online platforms – check that out when you first enquire

Not all factoring companies are the same.

Sometimes going for the cheapest factoring organisation is not in your best interest. Make sure you understand the added value available to you.

Some things to consider:

• How global they are if you do business abroad – what offices are available overseas?
• Will you have a dedicated point of contact?
• How often do they keep in touch with you?
• How knowledgeable are their people on your industry sector?
• Do they have positive customer reviews?

Once you contact a factoring company, they’ll generally arrange a meeting or a phone call and ask for specific documents and information about you and the business. From there, they make an offer to you which you can agree to or not.

Assuming you agree to their terms, you’re ready to get started. Make sure you’re clear on how you will receive your monies – some use bank transfers, others use wire transfers which can be faster. Check this all out upfront.

Most factoring organisations pay in two instalments: the first payment anything from 80 to 95 percent of the value of the invoice; the second payment the remainder less the agreed fees. Check when these payments are due. Some companies will pay per invoice - others will batch up these payments and you’ll receive a lump sum.

Factoring is a great option for businesses looking for a way to access monies owed fast, without adding to their debt profile. Look for a factoring organisation that has expertise in your industry, one that understands the challenges and opportunities of keeping cash flowing so that you can invest in growing your business. 

If having read this article you think factoring is right for you, why not talk to one of the team at Bibby Financial Services? Contact Us or call them direct on 65 6922 5030.