If you own or operate a small business, then you’re well aware of the many challenges that can arise on a daily basis. Everything from employee management and accounting to IT and marketing may quickly become your responsibility, depending on circumstances. Having an agile, entrepreneurial mindset is the key to success.
Of course, all of these duties and responsibilities can add up and take your attention away from things that will actually grow your business. One of the most frustrating things you probably deal with in your business is collecting unpaid invoices. Not only is chasing down clients for payment an unpleasant experience most of the time, it’s also incredibly time consuming. Between the phone calls, emails, conversations, follow ups, and arrangements, collecting invoices can start to feel like a full-time job in and of itself.
In fact, this is such a major issue for many businesses that there are now companies called invoice factoring companies and accounts receivable financing companies that eliminate the stress and time associated with following up on unpaid invoices. Best of all, these companies give you the instant cash flow you need so that you can get back to running your business without waiting until a customer pays their invoices.
So, how does invoice factoring work?
Essentially, these companies take on your invoices at a portion of the full cost of the invoice, typically anywhere from 80% to 90% initially, with an additional payment due after they’ve collected your money. They then offer instant payment on them, which means you’re not waiting for days – or weeks – for working capital for your business. It’s literally like a cash advance to your business, based on the invoices you generate. They then take on the role which you used to play by following up with customers for payment for the full amount of the invoice. The difference in what they pay you for the invoice, and what they collect from your customer, is their profit.
But is it worth giving up the potential of collecting on the full amount? Does this kind of service make sense for a small business? There’s a lot to consider beyond just the convenience of having access to instant cash flow when partnering with an invoice factoring company.
Why do you need invoice factoring companies?
The big question when it comes to invoice factoring companies is why you would need to consider using their services. Is it really worth giving up 10% to 20% of your invoice values right away to secure guaranteed cash flow? The reasons why you may want go this route will vary based on your niche and your business needs.
One of the main reasons many business owners choose to partner with an invoice factoring financing company is because they simply don’t have the manpower to follow up on invoices regularly. If you run your own business, you probably spend a lot of time wearing many different hats and working in the business itself. Every second spent following up on invoices is a second that you’re not actually managing – and growing – your business.
One way to handle this problem is to hire a dedicated Accounts Receivable employee. Of course, this can come at a significant expense, since full time accounts receivable staff demand competitive salaries and benefits. Even after paying someone to take on that role, there is no guarantee that they will be able to get customers to pay any faster. An invoice factoring company offers cash flow right away when they essentially pay for the right to collect your outstanding invoices. An accounts payable employee doesn’t come with that same defined benefit.
One of the main things that comes up when discussing invoices and collections is switching to a prepayment model. If clients have to prepay, then theoretically there shouldn’t be a need to worry about delayed cash flow and unpaid invoices. The challenge with making this switch is that not all clients are willing to go along with a prepayment schedule. This is especially true for larger companies with established policies that state they will remit payment a set number of days after receiving the invoice. 30-days is the most common amount of time allotted for payment in many industries.
Unfortunately, trying to shift companies away from traditional invoicing to prepayment may be downright impossible. If a company cannot work within a prepayment schedule, then there is the very real risk that they will take their business elsewhere. And the only thing worse than delayed cash flow is no cash flow at all.
Above all else, it’s important to remember that cash flow is king in any business. Without adequate incoming cash flow, you simply can’t pay your location lease, utility bills, employee salaries, and loan payments. When cash flow dries up, the business isn’t far from failing entirely, which is why many businesses ultimately decide to use an invoice factoring company. While they may lose some of the overall value of their invoice, they gain a lot of value by having a guaranteed instant cash flow into their business.
Finally, invoice factoring is one of the most affordable methods of short-term financing you can get for your business. If an invoice factoring company offers a discount rate of 3% after all remittances have been made, then what you have essentially done is received a loan at 3% interest with no payments required. Considering a standard small business loan can easily run into double-digit percentages, invoice factoring is a much more affordable and appealing financing option. Plus, with invoice factoring, you don’t have to make regular payments like you would to maintain a loan, which can put a major dent in your cash flow. The loan is paid for up-front with the transfer of the invoice.
It’s also very easy to get approved for invoice factoring since you are basically securing the loan with existing business activities. With a bank loan, you may need to provide documentation going back a number of years, and prove your creditworthiness by passing a business credit check through maintaining a high credit score, along with earning a specified level of annual revenue. With invoice factoring, you just need to be able to show that you own a business that sends out invoices that the invoice factoring company can collect on. This is especially handy for new businesses that simply may not be able to provide the level of documentation that a traditional lender, like a bank, may require. Plus, there are no long-term contracts.
When do you need invoice factoring companies?
There are a number of reasons why you may want to consider partnering with an invoice factoring company. But when is the right time to make the shift from in-house invoice collection to an invoice factoring service? There are actually many stages throughout the growth of your business where invoice factoring may be a great idea.
One of the most obvious times when invoice factoring could prove to be very helpful is in the early stages of growing your business. There are several reasons for this. First, finding financing as a new business can be very challenging. Banks may want years of financial documents that you simply won’t be able to provide. On the other hand, an invoice factoring company just needs to see outstanding invoices that show you’re currently earning income through your business.
Another great feature of invoice factoring for new businesses is that it can help small startups stay small and lean while they grow. Whenever you start a new business, chances are that cash flow may be tight to begin with. As a result, hiring staff must be carefully considered. A position like accounts receivable may simply not fit within your budget. Invoice factoring essentially takes on the role of accounts receivable for just a portion of the total amount of your outstanding invoices.
One of the nice things about invoice factoring is that these are essentially unsecured loans, and funds can be directly transferred into your bank account. Most lenders want borrowers to put up some type of collateral to guarantee a loan. For small business owners, this often means using personal property, like your home, as security for a loan. With invoice factoring, there is no security. The invoice is the guarantee for the loan.
There may be times, no matter what stage of growth the business is in, where cash flow becomes tight. This means that loan payments could be missed, payroll could become a challenge, and simply keeping the doors open could become a major struggle. This may not necessarily be because the business has come onto hard times, however. Rather, it could simply be because there are a significant number of outstanding invoices awaiting payment. Instead of trying to hold off and wait for payment while potentially letting other financial responsibilities fall by the wayside, you could use invoice factoring to help improve cash flow to keep your business running smoothly.
A very common scenario when business owners decide they need to look into invoice financing is when they find they are dedicating far too much time to following up on invoices. Most business owners are passionate about what they do and love trying to grow their business. Spending time trying to collect on outstanding invoices is not usually the best use of your time, however. That’s time you aren’t building relationships and putting your personal touch on business operations. If you find you’re spending more time working the phones due to unpaid invoices, and it’s beginning to affect how you’re operating your business, then perhaps it’s time to look into invoice factoring.
You may also find that you have developed a great base of business with several repeat, loyal customers. Unfortunately, these customers may have 30-day payment policies for their invoices. This means you’re waiting 30-days after delivery of the invoice before you actually receive payment for your work. If this represents a large portion of your business, cash flow can become a nightmare to manage. Invoice factoring can help eliminate the stressful 30-day wait for payment. This way, you’re able to keep your existing client base and allow them to pay on the terms they feel most comfortable with, while also ensuring you have access to the money you need to keep your doors open. It’s a win/win for both you and your clients.
What to look for in an invoice factoring company?
There are many different features to look for when choosing an invoicing factoring company. While most companies operate on the same basic idea of offering instant cash flow in return for your outstanding invoices, some offer unique features that may make them more suitable for your business.
Probably the most important feature to look for is the amount of time it takes to approve and fund financing based on your invoices. If you’re looking for quick cash flow, then it would only make sense that you also need to partner with an invoice factoring company that offers fast approval of financing. If they’re approval is too slow, then you are basically in the same situation as you were with your outstanding invoices, and you’re around sitting waiting for an injection of cash flow either way.
It’s also important to look into the requirements for financing. Some invoice factoring companies will only want to see several months of consistent invoicing, while others will want to see an invoice history that spans a much longer length of time. This difference will determine which companies are suitable for your business based on how long you have been operating, as well as how much potential cash flow you can show in your application.
How invoice factoring companies go about collecting the outstanding balance from your customers is a very important feature to consider as well. After all, these are your customers and the experience they have with the invoice factoring company your partner with is a reflection of your business as a whole, even though the invoice factoring company is an independent third party. It may be hard to compare collection tactics, but there are a few ways to go about doing your due diligence.
First, read online reviews from businesses that have worked with each invoice factoring company you’re considering. This will provide you with valuable insight into the collection practices of each so that you can pick a company with methods that align with the values and service you have within your own business. You may also want to closely review the company’s website for mention of customer relations. If all else fails, just ask the invoice factoring company how they go about collecting on an invoice. Some companies may simply be willing to take on invoices and wait patiently for the 30-day payment period to pass. Others may take a more hands-on approach with collections, which may or may not be reflective of how you want your customers to perceive your business.
Pricing, of course, is always a top concern when it comes to any type of business financing. Obviously, for an invoice factoring company’s services to be worth it, the rates that you pay should be competitive with those of traditional lenders. While there is a general range of pricing when working with invoice factoring companies, there are a number of factors that play a key role in determining final costs.
Generally speaking, most invoice factoring companies pay you in two different installments. The first payment comes with the approval of the financing and the transfer of ownership of the invoices. This is usually 80% to 90% of the total invoice price as an initial payment. The second payment comes after the client has paid the invoice. This payment is what determines your actual cost to borrow and can range from 7% to 15% of the remainder of the total invoice cost.
For example, let’s say you have an outstanding invoice amount of $1000. You partner with an invoice factoring company to take on this invoice and they provide you with 80% of the total value of the invoice as an initial payment. This puts $800 into your pocket right away. After they collect on the invoice, they may offer an additional payment of 15% of the total value of the invoice, which amounts to $150. When all is said and done, in this scenario, you would collect $950 from the transaction, which essentially makes your interest rate 5% for the financing. Of course, this is just an example and rates will vary from company to company. Rates most often vary based on how established your business is, as well as the total dollar amount of your invoices, amongst other things.
Another thing to consider when it comes to pricing is if there are any additional fees for the financing. Some companies may require an initial fee when activating the transaction, which can add to the total overall cost. Others may simply take their cut after the collection of the invoice and not charge any hidden fees on top of that. This is an important differentiator when comparing invoice factoring companies, and is one example of why it’s important to look beyond the rate for financing and, instead, consider all of the costs together to make the most informed decision for your business. Be sure to read your factoring agreement carefully, as often times, these fees are buried in the fine print.
There may also be late payments fees that can affect the final amount that the invoice factoring company provides to you. If a client was scheduled to pay within 30-days and the invoice factoring company doesn’t receive payment by then, they may end up taking the late payment fee from your final deposit amount. This can affect the total cost that you were expecting. Late payments are not something that should be entirely unexpected so it’s important to understand late payment fees clearly and factor those into the actual final payment amount you receive.
The ease of use when it comes to interacting with the invoice factoring company and their platform is something else to consider when picking a partner to work with. How is the application done? Some invoice factoring companies offer easy online applications, and even mobile apps for business owners on-the-go. If quick cash flow is your primary goal, be sure that the application and approval process conveniently meets that need.
After securing the invoice financing, you will want to find out how you can follow up on the status of unpaid invoices. Is there an online web portal where you can login to see how long the invoice has before it incurs late payment fees? Are you able to see when invoices have been paid and cleared up? This can be important as the final deposit amount will ultimately affect your cash flow and, if you are noticing a client regularly fails to pay on time at a significant cost to you, you may wish to look for other ways to collect payment from that client.
Finally, you want to look at the customer service offered by the invoice factoring company. There are two levels of customer service to consider. First, of course, is the customer service offered to you. Is there a way to connect with someone regarding your financing? Are customer service reps available 24/7 or only during business hours?
The second part of this is the customer service that interacts with your clients who have unpaid invoices. Can your clients follow up easily with the accounts receivable factoring company? Is the set up difficult for them to remit payments? If they have questions, are customer service reps available to answer them? These are all important things to consider before partnering with a invoice factoring company.
Finally, once the invoice has been paid, it’s good to know how long it will take for the invoice factoring company to remit final payment to you. Initial payment is just one part of the equation. If the final payment is slow, then your cash flow could be negatively affected.
Once you have evaluated all of these features, it’ll be much easier to compare and contrast the benefits of each invoice factoring service provider and choose the one that works best for the unique needs of your business.
Paragon Financial Group
- Overall: 4.13
- Features: 3.5
- Pricing: 5
- Ease of Use: 4
- Customer Service: 4
Paragon Financial Group is an established loan factoring company with over 25 years of experience in the industry. One of the immediate benefits of choosing Paragon Financial Group that jumps off the page is their incredibly low rates. These can vary based on the type of company owing the invoice and how long it has been outstanding but, generally, after all payments are complete, rates range between 0.9% and 2.5%. On their website, Paragon advertises their “soft touch” customer approach so that you can feel confident they will give your customers the same level of service as you would provide. One of the only downsides with Paragon Financial Group is their restrictions for providing loans. Your business must be able to show at least $30,000 per month in sales which may exclude new businesses. With that said, they will consider new businesses that are rapidly growing and can show that level of sales; you don’t have to be an established company with a long history of sales.
- Overall: 4.38
- Features: 4
- Pricing: 4.5
- Ease of Use: 5
- Customer Service: 4
BlueVine offers one of the sleekest invoice factoring platforms in the industry. The website is clean and easy to use, like how you expect a website to look in 2019. Best of all, their application process is a breeze and you can have an answer regarding your financing in as little as 10 minutes. Then, once you have reached an agreement, their clean customer portal on their website allows you to monitor the progress of invoice collection and the fees that have been accrued. The pricing of BlueVine is competitive but definitely not leading the industry. Their rates are charged weekly and can fall anywhere from 0.25% to 1.7%. Depending on how long it takes them to collect from your client, the fees can certainly add up quickly. BlueVine also won’t take invoices from consumers. This limits the type of invoice you may be able to send them as they want to see B2B or government invoices for their financing. All in all, BlueVine is a flexible solution that’s competitive in every aspect of invoice factoring.
TCI Business Capital
- Overall: 4.38
- Features: 4.5
- Pricing: 4.5
- Ease of Use: 4
- Customer Service: 4.5
TCI Business Capital is another very well-established invoice factoring company. One of the immediate features that stands out with TCI Business Capital is the wide range of industries they will support with invoice factoring. Some invoice factoring companies are limited in the types of businesses they will work with. While TCI does have limitations, they are far more open to a broad range of companies that could even include staffing agencies, oilfield companies, telecom companies, and more. The rates offered by TCI Business Capital are competitive but not exciting. The interest rate after collection is 2% and the monthly factoring fee can range anywhere from 1% to 4%. If it takes them a couple of months to collect, for example, you could be paying a total fee of up to 10% when you combine the factoring fee and the interest rate. However, if they can collect quickly, the total rate will end up being far lower than an unsecured bank loan. The live chat and telephone customer support is great and allows you to submit an application easily and conveniently with approved factoring loans getting funded the same day.
- Overall: 4
- Features: 3.5
- Pricing: 5
- Ease of Use: 3.5
- Customer Service: 4
AltLINE offers one of the most affordable factoring fees of all invoice factoring companies researched. This immediately makes them a competitive consideration if you’re looking for flexible cash flow through invoice factoring. With a factoring fee of just 1.5% to 3% and up to 90% payment initially, invoice factoring through AltLINE could easily be one of the lowest interest rate loans available to your business. However, where AltLINE excels with their rates, they fall behind the competition when it comes to overall service and features. The website feels somewhat dated and the application process is not as sleek or fast as other offerings on the market. Typical approval time is anywhere from 5 to 7 business days with another day added for funding. If you need cash flow today, AltLINE may be unable to help due to their slower timelines. However, if you are thinking ahead and you can wait a little longer, the lower rate may be worth the added time.
Triumph Business Capital
- Overall: 3.75
- Features: 3.5
- Pricing: 3.5
- Ease of Use: 4
- Customer Service: 4
Triumph Business Capital lags behind the competition when it comes to their overall interface for getting an invoice factoring loan. The website is not sleek or friendly to use and important information like rates or fees are not transparent. This makes it hard for you to compare Triumph Business Capital as an option against the other players in the market who are very upfront about the costs of using invoice factoring to increase your cash flow. Once nice feature of Triumph Business Capital is their sleek customer portal. This allows you to monitor the status of invoices and keep track of fees. Of course, this isn’t available to you until after you have chosen to partner with Triumph which may be difficult considering their lack of transparency. With that said, they do have positive reviews from existing customers and their dedicated accounts receivable specialists make collection much easier than doing it yourself.
- Overall: 4.38
- Features: 3.5
- Pricing: 5
- Ease of Use: 5
- Customer Service: 4
Payability is easily the most sleek, easy to use platform of all of the invoice factoring companies reviewed. It’s easy to apply, approval is fast, and funding is delivered quickly. If you need quick cash flow then you can count on Payability to deliver. However, the major downside to choosing Payability is that they limit the businesses they work with. Specifically, Payability works mainly with e-commerce businesses. If you aren’t an e-commerce business, you may have to look elsewhere. As far as pricing goes, Payability is definitely among the leaders in this space with rates hovering around 1% to 2% after they have received full payment for the invoice. This means that you can essentially get up to 99% of the total invoice rate for your sales without waiting for payment to boost your cash flow. Businesses with much higher sales, over $7500 per week, may be able to secure an even lower rate that makes Payability one of the most affordable loans you will find anywhere, period. Their customer service platform is sleek to match their website and application process. If Payability ever expands beyond serving e-commerce businesses, they would be a definite top choice for anyone seeking an invoice factoring loan.