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Working with an invoice factoring company is an easy way to get paid quickly. Waiting for customers to pay their invoices can drain your resources, especially if you’ve already had to pay out for parts or personnel to service them. Factoring invoices enables you to exchange your unpaid ones for cash in as little as 24 hours. But choosing the right finance partner can be tricky – some charge high commissions or hidden fees so it pays to shop around. In this article, we walk you through how to pick the right invoice factoring company for your needs.

Why Work with an Invoice Factoring Company?

Waiting for customers to pay can be frustrating. If you run a seasonal business, have variable cash flow, or are in an industry with elongated payment cycles, then you’ll know the pain. Even if you don’t, you’ve probably come across customers who are super-slow to pay, or demand extended payment terms. This can significantly affect your income and cause headaches with your balance sheet. Working with an invoice factoring company enables you to transfer the debts to them in return for cash. This frees up business capital to repay your costs and invest in other areas.

Another benefit of working with an invoice factoring company is the simple application process. Compared with a bank, alternative lenders offer more streamlined applications that are easier and quicker to complete. There are often fewer hurdles with less strict requirements on the business wanting finance services. Higher approval rates mean that many small and mid-sized businesses can qualify for invoice factoring (even if they have had bank loans declined in the past).

What is Invoice Factoring?

Invoice factoring (sometimes referred to as accounts receivable financing or AR for short) is the name of a financial transaction. It involves a business selling its accounts receivable to an invoice factoring company. This frees up cash to be used as working capital which can be spent on paying existing commitments (such as payroll or stock replenishment) or expanding the business.

The transaction usually involves three parties; the invoice issuing company (you), the factoring company (us), and the customer who owes the invoice payment (your customer). The invoice factoring company supplies the money so that you can spend more time on generating new business instead of chasing up existing customers.

How Does Invoice Factoring Work?

Invoice factoring (sometimes known as invoice financing) involves a simple process. Here’s a step by step breakdown of how it works;

  1. Once a business has supplied its product or service to their customer it will usually generate an invoice.
  2. The business sells this invoice to a factoring company, usually for 70-90% of the value.
  3. The business receives the cash and can use it immediately to buy supplies, pay employees, or invest in new business development.
  4. Once the customer has paid their invoice, the factoring company issues a rebate to the business for the remaining amount of the funds (after taking off its fee).

This process creates a win-win situation for all parties involved. The business gets their cash quickly so that they can reinvest it into their business. Customers benefit from more favorable payment terms than they would be able to get otherwise. And the invoice factoring company receives a fee for their services.

Picking the Right Invoice Factoring Company

Invoice factoring companies come in many shapes and sizes. When choosing the right one for your needs it’s important to consider several aspects, including pricing, contracts, and confidentiality. In this section, we look at some of the key considerations to take into account.

Transparent Rates & Fees

Let’s start with the most important aspect for many business owners: the price. Accounts receivable factoring can cost 1-5% of the face value of the invoice, often more from traditional lenders. But there are also other fees that can be charged in addition to this so it’s important to do your homework.

Many invoice factoring companies take a secretive approach to their fees. They include hidden costs in the small print and surprise you with additional administration charges at the end of the process. Some companies will entice you with low rates only to make up the difference with additional fees on top. By contrast, Strategic Capital takes a transparent approach to pricing, so you know exactly what you’ll be charged from the very beginning.

It’s also important to determine how much cash you will receive upfront. A reputable invoice factoring company should give you an ‘advance’ that equates to 70-90% of the invoice value. If they try to give you any less, then take it as a warning sign and walk away.

Contracts & Penalties

Some invoice factoring companies require you to sign up to long-term contracts. This can lock you in for a set time period and require you to pay sky-high cancellation fees if you want to exit early. These types of contract often necessitate you to meet factoring minimums so won’t be suitable if you just want to use their services occasionally. This may mean that you end up paying for a service that you aren’t using regularly.

Reading the contract carefully will also highlight any penalties that you may be charged. An invoice factoring company may try to charge you hidden penalties and bury them deep in the depths of their fine print. But knowing what they are and how they are triggered in advance can help you to avoid them. If you don’t think the penalties are fair or reasonable then you can keep looking for another invoice factoring company.

Some companies require you to put all your invoices through them which is often referred to as ‘whole ledge’ factoring. This means that you have to pay fees on all of the invoices you receive from a particular customer even if you only want one or two of them to be factored. Spot factoring is the alternative option where you’re able to decide exactly which invoices to have factored. This gives you complete control over your finances and the fees you’ll be charged. It’s a more flexible approach but can incur additional levies, depending on which invoice factoring company you choose.

Confidentiality

Confidentiality can be an important consideration when selecting an invoice factoring company. Most will notify your customers after you’ve sold your invoices and request that payments are then made into their account instead of yours. This won’t be a big issue for some small businesses, but others will prefer to maintain an element of discretion. They may want to retain control over customer communications and not have the factoring company in direct dialogue. If this is important to you then look for ‘non-notification factoring’ so that you maintain complete control in this area.

Choosing an Invoice Factoring Company

Choosing the right invoice factoring company means thinking about several different aspects of the transaction. How often are you looking to use their service? Are their fees transparent and fair? Do they offer non-notification factoring? There is no single best option, but the right company will be a good fit for your specific business needs.

Invoice factoring works well when all the parties involved derive a benefit from the transaction. By choosing the right invoice factoring company you can create a win-win situation for your business and your customers, by offering them favorable terms but receiving the cash immediately. This type of business financing can free up working capital that allows you to pay your bills and staff faster, pursue expansion opportunities on your own timeframe, and enjoy hassle-free customer payments. By doing a little research up front, you’ll be able to find an invoice factoring company that provides the flexibility, transparency, and competitive terms you’re looking for.

How We Can Help

Strategic Capital offers invoice factoring services that support organizations across the USA. Whether it’s to pay for your everyday costs, emergency repairs to equipment, or investing in expansion, we offer small business financing solutions without the hassle of traditional banks. Best of all, you’ll benefit from competitive terms and a simple application process, so you’ll soon have more money to reinvest into your business.

Transparency, innovation, and expertise are the driving factors behind everything we do. With a talented team of advisors, a plethora of funding partners, and the best technology available – we go above and beyond to help our clients receive their capital rapidly with the industry’s most competitive repayment options and interest rates. We want to break speed records, not bank accounts.

Our clients receive cash in advance of payments from their customers, typically within 30, 60 or 90 days, providing needed capital to meet operational overhead. Unlike other types of financing, AR financing focuses on your sales, not your balance sheet. As sales increase, more working capital becomes available to meet the demands of operating your business. AR financing provides a continuous, long-term source of funds on a short-term basis. Learn more about our invoice factoring services here.