Every growing business goes through patches where the numbers just don’t add up the way you want them to. Your company might be committed to a project you can’t afford to complete. Or, you might just need a little bit of wiggle room to get by. When those hard times hit, it’s important to be creative if you want to keep your company from stagnating.
A factoring company could be just what your business needs to keep growing during hard times, without missing a beat. But they aren’t just for struggling businesses. Factoring companies can also help business get a quick cash boost for buying equipment, land, or buildings.
What is invoice factoring? How can it benefit your business? Where do you find this kind of service? Read on to get started with invoice factoring today!
What is Invoice Factoring?
It can seem like a confusing concept at first glance, but here’s what it means in simple terms.
When your business needs cash immediately and your next invoice is still weeks or months away, you can sell your future payments to an invoice factoring company for a quick advance.
Your business gets deducted a percentage, and you get the capital your company needs today!
Invoice Factoring Services
There are a few different types of factoring services, and it’s important to pick the one that fits your needs best.
Recourse factoring is the most common, requiring you to refund your factor company for any payment not received.
Nonrecourse factoring is more costly, but could be the better option if you’re working with new or struggling clients that might miss or make late payments.
Spot Factoring isn’t the most cost-effective, but it can be a good solution if your business just needs a one-time advance rather than long-term factoring.
Recourse factoring requires you to pay back any invoices to your factor that your client does not pay. Because your business takes on the financial risk of delinquent accounts, this is cheapest and most common option.
This is generally going to be your best bet for cost effectiveness and quick turnaround.
Recourse factoring tends to take under 24 hours before your business receives cash in hand.
The difference with nonrecourse factoring is that the factor company takes on the financial liability should your client be unable to pay their invoice. This option is more costly and puts your business and clients under heavier scrutiny.
This is a good option if you’re working with less established clients, and you don’t want to take the hit if they can’t make their payments, or make them late.
This could be a good fit for you, but keep in mind that with this option, your factoring company will take a larger cut of the overall payments, and they’ll scrutinize you and your clients more closely, which can lead to a longer turnaround time.
With spot factoring, your company sells an individual future invoice to a factor.
The spot factor gives your business a percentage of the invoice (70-85%).
When your customer pays the invoice, your spot factor collects what they paid you, plus their fee, and turns over the rest to you.
For large invoices, this can give your business a quick and easy cash boost, but real savings in invoice factoring come from long-term contracts, so this is the least cost-effective of the three.
But sometimes, your business just needs a one-time boost, so it’s important to pick the option that works best for you.
It’s important to recognize that some factoring companies might be a better fit for your business than others.
Invoice factoring has only recently gained popularity as an approach to giving businesses immediate working capital. As a result, many factoring companies specialize in industry-specific financing.
If you’re a construction company, you may have better luck with a construction-oriented factoring company than a general, multi-industry financier.
Do your due diligence, and find out what fits your business best!
Construction Factoring Companies
The construction industry has largely used invoice factoring for years. Due to the nature of how construction projects are completed, it makes financial sense.
Construction companies tend to work on projects in sections or phases. Instead of waiting for payment of one phase before moving onto the next, construction companies can be more efficient by collecting payment overnight, and continuing into the next phase of the project immediately.
Trucking Factoring Companies
Trucking companies run into similar roadblocks. Freight customers generally pay invoices on or after delivery of their shipment and sometimes are signed to a contract, so that they pay at regular intervals, instead of for each shipment.
But a growing trucking company may not be able to wait for payment weeks or months down the road if they want to keep their trucks on the road.
Trucking factoring companies specialize in advancing truckers the cash they need, whether you’re a small business with one or two trucks, or a large company with hundreds of trucks and employees.
Truckers aren’t the only ones in the freight industry that factor their invoices though. Many third party logistics providers and freight brokers use factoring too.
Other Factoring Companies
These are just a few examples, but there is a wide array of industry-specific invoice factoring options. But don’t give up if you can’t find your industry right away.
Or if you’re really struggling, you could go straight to a multi-industry factor, and get the capital your business needs today!
No matter what company you go with, it’s important to go over your business’s current financial needs.
While invoice factoring can be a good option for a struggling or brand new business, some companies choose factoring because they prefer the convenience of instant upfront payments, and are willing to pay a fee for the security.
And don’t forget to take a hard look at your profits and expenses to determine whether recourse factoring, non-recourse factoring, or spot factoring is the best option for you.
So don’t let your business fall into debt, and spend the next several months trying to dig yourself out of a hole. Start researching your options and find out how to use a factoring company to help your business today!