Get paid faster with invoice factoring

Businesses wait well over 30 days on payments from customers, sometimes 60 or 90 days, pummeling cashflow. The Covid-19 pandemic hasn’t made the wait any easier with 57% of SMB B2B payments being collected late in 2020. 

With payment delays on top of typical 30-day payment periods, these businesses are left with missing money from their accounts over lengthy spans of time. Invoice factoring is an attractive option that can help businesses unlock cash flow while waiting for payments while also adding a layer of financial security in these uncertain times.

What is ‘invoice factoring’?

Invoice factoring is a way for a business to finance their invoices and accounts receivable. A business can ‘sell’ an invoice to a factoring company for an upward of 70%-90% of the invoice amount depending on the agreed terms. The factoring company pays upfront with cash during the transaction.

As the new ‘owner’ of the invoice, the factoring company is now responsible for the invoice and for making sure the invoice gets paid. When it’s time for the customer to make the payment, the payment goes directly to the factoring company instead of the initial business. 

The factoring company then takes their fee from the given payment, and returns the remaining amount to the business. Fees can range from 1%-5% of the total invoice. This means that ultimately, a business will get 95%-99% the value of the initial payment.

Improve your cashflow

If a business doesn’t receive the entire value of their invoice, why would they use invoice factoring? The biggest benefit of invoice factoring is to unlock cash flow that would otherwise have to wait until a payment is finally received.

B2B payments as a resource-intensive process

In the world of B2B payments, merchants and vendors agree on payment terms with the buyer and fulfill that order. When that order is filled, an invoice is sent based on those payment terms, usually giving the buyer 30-90 days to make their payment. 

A business can be stuck in a difficult situation during those 30 days. Take this scenario -

Marketfaire is a small distributor of washing machine parts. Marketfaire has just filled a purchase order, and the invoice value is $100,000, with the cost of fulfilling that order at $70,000. Marketfaire sends the invoice and gives the customer 30 days to fulfill the payment. Marketfaire fills another 9 orders each costing $70,000. As of now, Marketfaire is at a shortage of $70,000 from completing those orders.

This amount scales up exponentially as order costs increase, and businesses are left to bear the financial burden until payments are made. This drives businesses into a corner as they have less and less immediate cash to complete more orders, run their operations, and grow their business.

In this situation, Marketfaire is stuck planning around its existing cash and pending payments. The company may need to pause on taking big orders, postpone large orders, or halt orders altogether until they have the financial confidence to take on more requests.

One choice Marketfaire has is to apply to Factor for their pending invoices. Factor agrees to take on the invoices at 90% of their current value for a 1.5% fee. The company immediately pays Marketfaire $90,000 to take ownership of the invoices, and waits for their payments. Once Factor gets paid by the customers, they keep $1,500 for their fee and gives the remaining $8,500 of the invoice back to Marketfaire. 

As the burden of getting paid is shifted from Marketfaire to Factor, the business can now use the newly acquired $90,000 to grow the business with capital they would otherwise not have access to. They can order new parts, plan to expand their AR department, or have the comfort knowing there isn’t a $70,000 gap in their accounts anymore. 

The factors that influence invoice factoring

While invoice factoring is an attractive option to finance a business’s invoices, there are many aspects that go into a factoring company’s decision to take on invoices and at which rate to buy an invoice. These companies ask for information like transaction history, industry, age of business, bank statements, and customer background. 

Factoring companies take on the risk of an invoice as well, so it’s important to thoroughly vet an application and to create an agreement that’s right for them. Here’s a list of documents a factoring company might ask for in an application. 

There are also different characteristics of factoring companies. Some target startups and invoices up to $500,000. Others target larger and more established industries and businesses and are willing to take on more value. Just as factoring companies make sure the applicant is a good fit, businesses need to determine if a factoring option is the best for them. Here’s a list of popular factoring companies and the differences between them.

How invoice factoring companies can better help businesses

There’s a clear growing need for immediate cash across B2B. In order to encourage businesses to factor their invoices and make it a more accessible option, factoring companies can benefit by creating more seamless applications.

Factoring companies can make processes faster by being able to analyze items like transaction history much quicker. Photon Commerce can make it easy for factoring companies by breaking down data from invoices and bank statements in a snap, allowing them to better understand their data, create concrete proposals, and build better relationships with businesses. Learn more at photoncommerce.com. 

Next steps

Invoice factoring is a powerful tool that can open up a business’s financial options and empower them to further grow their business. As uncertain times continue, businesses can have the confidence to continue expanding and servicing their customers.