Invoice/Receivables Financing

We assist our clients in obtaining working capital through accounts receivable factoring for their businesses.

Intro To Accounts Receivable Factoring

Many businesses encounter delays in receiving payments after delivering goods or services, impacting sectors like medical practices, construction, and wholesale. Typically, business owners wait several weeks for payments. If a client delays payment on an outstanding invoice, this period can stretch from weeks to months. Even when payments are timely, the arrival may not align with the monthly bills, affecting profitability. Accounts Receivable Factoring provides a solution to these challenges.

This flexible financing option accelerates your payment cycle to just a few days, easing cash flow constraints, enhancing profitability, and covering unforeseen expenses.

In this comprehensive guide, we will address the following questions and more:

What Is Accounts Receivable Factoring?

Accounts Receivable Factoring, also known as “Invoice Factoring,” allows a business to sell its unpaid invoices to a factoring company, or “Factor,” at a discounted rate. The factoring company then takes on the responsibility of collecting payment from the customer. After collecting the payment, the factoring company sends the remaining invoice amount to the business owner, subtracting the factoring fees.

This financial arrangement is particularly beneficial for small business owners who face long delays between delivering goods or services and receiving payment. Invoice factoring accelerates the payment process for accounts receivables, giving businesses quicker access to funds and improving cash flow.

MAX FUNDING AMOUNT

$10K – $10M

FACTOR RATES

Starting at 1% p/mo

TERM

Up to 24 months

SPEED

1-2 Weeks

How Does Accounts Receivable Factoring Work?

Accounts Receivable Financing, or Invoice Factoring, offers a unique approach to business financing by focusing on the creditworthiness of your customers rather than your personal credit history or cash flow. This means that businesses don’t need an excellent credit score or perfect cash flow to qualify. Instead, eligibility is determined by your customers’ ability to make timely payments. If a factoring company has doubts about a customer’s payment reliability or foresees difficulties in collecting payments, your application may be denied.

This customer-centric approach also influences the percentage of outstanding invoices the factoring company purchases and the factoring fees involved. Typically, factoring companies advance between 85% and 90% of the invoice amount upfront, providing these funds within a few business days—much faster than waiting weeks or months for payment.

Factoring companies have their fee structures, including a fee for the second payment made once they collect from your customer. Generally, a lower factor rate is associated with a higher fee for the second payment.

While you might sacrifice a portion of your income, this trade-off provides immediate access to funds and shifts the responsibility of collecting payments to the factoring company, easing your cash flow management and operational burdens.

An Example of Invoice Factoring

When you sell your accounts receivables to a third-party factoring company, they determine the discounted purchase price using a factor rate. Here’s how this process works:

Imagine you have $20,000 in outstanding receivables, and the factoring company applies a factor rate of 3%. Based on this rate, the factoring company purchases your receivables at a discount, giving you 97% of the $20,000. This means the factoring company buys your receivables for $19,400.

However, you won’t receive the entire $19,400 upfront. Typically, you receive an initial advance, which is usually around 85% of the purchase price. In this scenario, you would receive an immediate advance of $16,490.

After the factoring company collects the payment from your customers, you receive the remaining 15% of the purchase price, which equals $2,910.

Receivables Factoring – Research, Facts, and Reports

Recent market research anticipates significant growth in the global invoice factoring market, which is expected to expand to $9.27 trillion by 2025. This growth is projected at a robust rate of 15.8% from 2018 to 2025, driven by the rising demand for alternative financing options among micro, small, and medium enterprises (SMEs).

Sources:

  • Adroit Market Research forecasts that the global invoice factoring market will reach $9.27 trillion by 2025.
  • According to Adroit Market Research’s analysis, the international receivables factoring market is expected to grow at a compound annual growth rate (CAGR) of 15.8% from 2018 to 2025.
  • Grand View Research highlights the increasing necessity for alternative financing sources for micro and SMEs as a key driver of this market growth.

What Are The Advantages of Accounts Receivable Factoring?

Similar to other types of working capital loans, receivables factoring is accessible to businesses with less-than-perfect credit histories and fluctuating cash flows. Approval is often more dependent on your client’s payment track record than on your own financial stability.

To fully appreciate the benefits of invoice factoring, consider the impact of delayed customer payments. The longer an invoice remains unpaid, the less profitable the sale becomes, much like holding unsold inventory. Your business continues to accrue expenses while waiting for revenue. Even brief delays in payment cycles can significantly affect profitability. When clients typically pay at the end of the month, most funds often go toward covering monthly bills. Having quicker access to cash allows for more substantial reinvestment in your business before these obligations arise.

Using factoring services also frees up valuable time by eliminating the need to chase down payments. Once you sell the invoice, you can stop daily reminders and maintain positive client relationships.

Furthermore, there is a common misconception that factoring companies aggressively pursue your clients for payment. This isn’t the case with companies like 800Funding—your clients are often unaware that their invoices have been sold in the first place.

What Are The Disadvantages of Accounts Receivable Factoring?

Accounts Receivable Factoring provides near-term financing but tends to be more expensive compared to traditional bank loans, which typically offer lower interest rates. The higher cost of factoring is due to its flexible requirements and fee structure. Like merchant cash advances, factoring involves a factor rate, contributing to its overall expense.

Approval for accounts receivable financing heavily depends on the reliability of your customers. If a customer consistently misses payment deadlines by several weeks, collecting from them becomes challenging. Thus, this financing option is most suitable for businesses with established customers and reliable partnerships. Smaller or less-established businesses may lack the reputation or credit profiles of larger counterparts, making approval more difficult.

Moreover, accounts receivable financing isn’t the only solution for managing late-paying customers. Simple strategies like sending more frequent invoices can sometimes prompt timely payments. Therefore, consider exploring other practical measures to address cash flow issues before opting for accounts receivable factoring.

PROS
CONS

Invoice/Receivables Financing Compared To Other Products

LOAN TYPES
MAX AMOUNTS
RATES
SPEED

Who Qualifies For Invoice/Receivables Financing?

Approved businesses generally met the following criteria:

ANNUAL REVENUE

$250K+

CREDIT SCORE

550+

TIME IN BUSINESS

1 year+

How To Apply For Accounts Receivable Factoring:

At 800Funding, we facilitate factoring agreements with various companies, accommodating receivables up to $10 million and offering competitive factor rates starting at 5.8%. Our streamlined funding process typically completes within two weeks. Here’s how you can get started:

Step 1: Ensure Your Customer is Reliable

Before approaching a factoring company, ensure your customer is reliable and will promptly settle their invoices. This is crucial for gaining approval from the factoring company.

Step 2: Gather Your Documents

To apply, you’ll need to provide the following documents and information:

Step 3: Complete the Application

You can begin the application process by contacting us via phone or completing our simple one-page online application. Make sure to provide the necessary details, including the specific invoice amount you intend to sell.

Step 4: Speak to a Representative

After submitting your application, a representative will reach out to discuss the factoring fee, factor rate, and terms of the transaction. This ensures transparency and helps avoid unexpected fees during subsequent payments.

Step 5: Receive Approval

The entire process typically spans about two weeks. Once your transaction is approved, funds are usually deposited into your bank account within 1-2 business days.

Your Receivables Financing Gets Set Up – Now What?

Invoice factoring isn’t just a means to secure funding for your business; it’s also an opportunity to establish or enhance your credit profile.

Regardless of the type of working capital financing you secure, ensure all payments are made promptly and in full. If you have a business line of credit or another revolving credit option, maintain a balance below the credit limit.

Consistently meeting your financial obligations for business financing will positively affect your credit rating. This can result in more favorable rates and terms when you pursue future factoring transactions.

What If I’m Declined For Accounts Receivable Factoring?

If your application for invoice factoring is declined, it may be due to concerns about the collectability of your invoices from customers. In such cases, we recommend exploring alternative financing solutions to meet your cash flow needs. These options might include a business line of credit or other products specifically designed for more immediate financial requirements.

If qualifying for these alternatives remains challenging, consider exploring business credit cards or personal loans, which typically have more lenient qualification criteria compared to traditional bank loans. For those facing obstacles related to poor credit, utilizing credit repair services can be beneficial. These services assist in improving your credit score by addressing underlying issues affecting your creditworthiness.

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