Invoice factoring offers companies a way to convert their receivables into cash quickly, for a price.
Invoice factoringallows business owners to borrow against their unpaid bills. This financing option can be useful for companies that don't normally receive approval for conventional financing. Technically, invoice factoring is not a loan.
Rather, you sell your invoices at a discount to a factoring company in exchange for a lump sum in cash. The factoring company then owns the invoices and gets paid when it charges them to its customers, usually within 30 to 90 days. Invoice factoring is a way in which companies can finance cash flow by selling their invoices to a third party (a factor or a factoring company) at a discount. Invoice factoring can be provided by independent financial providers or by banks.
If this is a resource factor, the factoring company may require you to repurchase the unpaid invoice or replace it with one of equal or greater value. You'll receive a cash advance on the purchase right after the factor verifies and purchases your receivables. This means that if the company's customers don't pay or go bankrupt, the funds immobilized on unpaid invoices can be recovered. While not all factors are fully transparent when it comes to pricing, Triumph Business Capital believes in being as transparent as possible, from the initial conversation to the funding process.
When a third party buys their invoices and starts collecting debts, their customers receive communications from that party. If your bills exceed the 30 to 45 days covered by the anticipated discount rate, you can expect an additional charge of 2 to 3% or more for every 30 days that the receivable is pending beyond the original 30 days. The best invoice factoring companies base their decision on the quality of their customers' credit, not on their own credit or business history. With an invoice factoring service, you don't have to wait for your customers to pay their bills to pay your vendors and employees, order equipment, and cover other business expenses.
The winning buyer is then responsible for collecting the balance of the invoice to receive compensation. Bill discount companies usually anticipate about 80% of the value of the bill and charge an interest rate higher than the premium (plus a monthly fee) to maintain the loan, for as long as it takes to repay it. If the contract is a resource factor and the customer doesn't pay, you may need to repurchase the factoring company's unpaid receivable or replace it with a more current receivable of equal or greater value. While there are fees associated with factoring invoices, they may be lower than the cost of paying dedicated credit control staff.
This may include one or more obligations against the company's assets, a personal guarantee from a director, or a guarantee (similar to a personal guarantee, in which a factoring company must legally demonstrate that a business customer cannot recover their advances).