Invoice Factoring Explained

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Have you ever wished that you had a solution to a short term cash flow crunch?

Well, today I have a suggestion for you. This is Judi Otton with Growth Cast and we are continuing our series on nontraditional business financing options. Today, I want to talk about invoice factoring. Invoice factoring is something that you may have heard of. You may have had someone try and pitch this to you. I’m going to explain it all today and tell you what to look out for.

So the way that invoice factoring works is, that you have provided a service or delivered some goods to a client and you’ve sent the invoice, and now you’re waiting for them to pay. The factor will come in, the invoice factoring company will come in and they will pay you a good portion, 80% or 90% of that invoice and then they will wait and collect the money from the customer. But now, for every week or month that goes by, they will charge you a percentage. So say they’re charging a percent a week, which is fairly common. If it takes them four weeks to collect that invoice, they will charge you 4% of the total, they’ve already paid you 90%. So they’ll pay you that other 6% when they get paid.

Some things to keep in mind if you’re considering this kind of financing – the invoice factor is going to get in between you and your customers. Your customer is going to pay them directly and sometimes that’s a little bit weird and may look a little odd to your customer. You need to have good invoicing practices. You need to be invoicing regularly and have very descriptive invoices where all the goods and services you’ve provided have been itemized. You need to have been in business for a while, at least a year, and you need to be dealing with other businesses or the government, not individual consumers. You also can’t normally do invoice factoring for those invoices that are really, really late, those customers that have just dragged their feet for 60 or 90 or more days. The factors don’t want those because they’re not likely to get paid in most cases.

Things to watch out for here – make sure you understand what the charges are going to be and, that you’re ok with that because they can be fairly expensive. Make sure you understand how the company is going to work with your client. If this is something that interests you and some of those things are things you’re concerned about. I actually have a factoring company that is very polite, very kind, and very businesslike when they’re collecting invoices on your behalf. So, reach out and I’m happy to provide an introduction.

I’ll be back next week with a new Fiscal Fitness Tip of the Week and we’ll continue this series on nontraditional business financing.