So you are looking for quick alternative funding for your business. You’re wondering what invoice factoring is and if it is an option for you? With invoice factoring, you can maintain your cash flow with instant working capital. This is achieved by turning outstanding invoices due in up to 90 days into cash now. Before deciding if invoice factoring is right for you, make sure you understand how it works, how to choose the right factor, and the cost involved.
An invoice is an agreement to pay for goods or services rendered. With invoice factoring, invoices are sold to a factor or alternative financing company. They pay for these invoices now so you don’t have to wait 30 to 90 days for cash your business needs now. The amount of cash you can generate depends on the value of your outstanding invoices.
Is Invoice Factoring a Good Option for Your Business?
Often used by businesses to cover short-term cash flow issues, invoice factoring has many benefits. First and foremost it offers businesses flexibility, by factoring an invoice that will match their needs in dollars and time.
Factoring is quick. Typically a business can be approved for factoring within days.
Cost is another consideration when obtaining alternative financing. Invoice factoring is less expensive than many other short-term financing options.
Do You Qualify?
Every alternative or specialty finance company has its own guidelines, but basically, there are three important factors in determining if your business qualifies for invoice factoring:
– You must invoice business or government customers, and your customers must have good credit scores and not be new businesses. Consumer invoices cannot be factored.
– Your invoices must be due and payable within 90 days. They must be unencumbered by other loans. You cannot pledge the same invoice as collateral for invoice factoring more than once.
– Your business should not have a history of serious tax or legal problems.
Basically, it’s pretty easy to qualify for factoring. While credit score and annual revenues can be a stopping block with other lenders,
that’s not the case with most factors. Some factors consider baseline credit scores or length of operation but typically these are not strict requirements. Your customer’s credit must be in good standing. Many factors will do a commercial credit check on your customers. In most cases, the customer will not even know their credit has been checked.
Types of Invoice Factoring
Spot Factoring
This type of factoring is a one-time, as needed transaction. If your business factors a $15,000 invoice due in 60 days, once your customer pays the factor, your transaction and financial obligation to the factor are fulfilled. Your business may have a variety of customers with different payment terms or your financing needs may change, making spot factoring a good option for you.
Factoring Contracts
Invoice factoring contacts are typically more of a long-term obligation and require a minimum monthly volume of invoicing. An example would be a 3 month contract requiring $25,000 per month in invoicing. If your business has a consistent amount of sales and regular repeat customers, a factoring contract could be a good option for you.
It’s important to do your research and find a company that understands your business. Compare cost and make sure they are reputable.
CFG Merchant Solutions (“CFGMS”) is a privately owned and operated specialty finance, and alternative funding platform. We focus on providing capital access to small and mid-sized businesses (merchants) in the U.S. that have historically been underserved by traditional financial institutions and may have experienced challenges obtaining timely financing. Our team brings to the table more than 60 years of institutional investment banking experience in the credit, commercial finance, and capital markets. Contact us to find out if factor invoicing is right for your business.