Using Invoice Factoring to Ease the Pain of Net 30

Even the best business managers and owners can feel the pain when clients or customers don’t pay promptly. When the payments stretch to 60 and 90 days before an invoice is settled, businesses that have many customers in that category can suffer under strain that threatens their survival.

Enter the Concept of Invoice Factoring

Although any business may experience a shortfall, when the time to pay employees comes, the cold hard numbers don’t add up, and the bills can’t be paid, a solution needs to be found. With a stack of unpaid invoices, the value of those invoices can be converted to usable funds in a hurry. That is the beauty of invoice financing.

The idea of meeting payroll, a steady expense that impacts lives, can throw a business owner into turmoil. If the payroll isn’t paid on time, employee morale may suffer, employee/employer relations may be strained, and the employee might leave.

Finding a way to meet payroll through invoice factoring could keep funds flowing on time. Using invoice factoring could seem like a miracle for the beleaguered businessperson. But, as with any strategy, the owner needs to review the options available, which vary from firm to firm.

How Invoice Factoring Works

• A business needs money and has unpaid invoices.
• Approaching the invoice factoring company, the businessperson applies for consideration, usually specifying the amount of invoices, plus details about the business.
• Upon approval, advances are offered based on the invoice amounts. An advance amount is provided to the business, a percentage of the invoice. The advances range broadly, but it is recommended that the businessperson look for advances in amounts of 85 percent and more.
• Once the advance is paid, the invoice factoring company retains a reserve amount.
• When the company collects on the invoice, the reserve is provided to the business minus the agreed upon fee.

Considerations for using invoice factoring include:

Amounts available. What amount do you need to make the payroll or pressing expenses? Can you manage with the amount you’re immediately able to obtain, which can be about 85 percent of the invoice total? Does the firm offering the invoice factoring require a certain credit line minimum amount or require a long-term contract? Avoid anything that entangles you for more than you need.

Fees required. Are the fees charged worth the effort? Check for any hidden fees, like an application fee, processing fees, credit check fees, and overdue fees when a client is late in paying. The amounts paid to the invoice factoring firm can vary from less than 1 percent to 5 percent. If the invoice is typically just a few days late and you can find another strategy, would that be less costly and headache inducing?

Turnaround time. Can the funds be obtained quickly? For each day you’re waiting, is it likely that your invoice would be paid? Time to receive funds after approval are shown as early as a day to several days. In contrast to a regular bank loan, payments can be made available within a much shorter time through invoice factoring.

How they treat clients. If you do apply for invoice factoring and are approved, the factoring company now owns your clients’ invoices. They are free to approach your clients. Do they have a track record of treating people well? Does the firm offer “non-notification factoring,” so the client would not know that their invoice is not directly in your hands?

Credit worthiness of your clients. If your clients do not have a clean credit record, it is possible that you might not be approved for invoice factoring. Do you know your clients and their current situation?

Being in business is tough. Entrepreneurs struggle, sometimes monthly, to make the numbers work. With the whole domino effect of businesses relying on other businesses to survive and succeed, a prudent business owner might consider invoice factoring a useful tool.

As with most financial tools, the terms can differ widely for accessibility, limits, fees, and whether contracts are required. Any prudent business owner would also do well to research the firms, their terms, and their reputations before enrolling.

Find the right firm with the right terms and your business could benefit — and so could your employees.

Featured photo credit: shutterstock.com via shutterstock.com

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