One of the most noted benefits of invoice factoring is the ability of a company to raise cash quickly and safely. Factoring also has a host of other benefits, some which you may not be aware of. Factoring can minimize risk against client bankruptcy, it doesn’t add debt to your books, can help with collections, along with many more tangible benefits for your company.
Invoice Factoring is a fast way for companies to raise working capital
A factoring arrangement can provide funding in as little as 24 hours. This can be extremely beneficial for a company that needs immediate working capital, or that is looking to expand their operations quickly. It can take a substantial amount of time applying for a loan and then hear back from them on whether or not they are willing to provide a company with the money needed. A business does not normally have that amount of time.
Invoice factoring shortens the collections process
Businesses sometimes have to wait for weeks or even months before they are paid for services rendered. During this time, they might be cash poor and may not have the funds available to grow their businesses or even pay for current operational expenses. Accounts receivable factoring remedies late-paying clients.
Invoice factoring allows companies to bring in money without taking on new debt
Debt can be a useful tool to build and sustain a business. However, it can also be risky, especially for new companies. Factoring allows companies to receive badly needed capital without relying on an expensive loan.
Invoice factoring can be an excellent option for companies having trouble qualifying for a bank loan
Getting a business loan has always been challenging. Today, it is even tougher because banks are holding on tighter than ever to their money.
If a company has not been in business very long or has had problems repaying loans in the past, then the likelihood they will receive a bank loan is small. In this case, a good alternative would be for a company to utilize factoring services.
Invoice factoring can help companies that have no collection department or an understaffed one
For small businesses that don’t have a collection department or adequate personnel, a factoring company can provide a much-needed service. Factoring can provide them with what they need (money) to survive and expand by advancing money for their invoices and then collecting on them. The seller will have to pay for these services, but it is well worth it for many businesses.
When SMEs buy and sell goods and services from each other, they typically adopt a credit system. Unlike consumer transactions, transactions between businesses typically takes a few months for processing. It is common for companies to use a 30 to 90-day credit period instead of demanding their customer pay cash up front.
However, this can lead to a cashflow problem for companies, especially if the payment term they offer differs from their supplier’s payment term. Just imagine if all your customers take 90 days to pay you back but your supplier wants you to pay them in 30 days. You won’t have enough cash to meet the liability to your supplier.
This is where invoice financing helps SMEs. Once you have delivered goods or services to your customer, an invoice will be issued. Let’s say the invoice has a 90-day credit period, but you need cash to pay your supplier in 30 days. Here’s what you do. You use the invoice as a collateral to get capital from P2P platform. P2P investors will give you cash up front. In return, they will get earn some interest once the invoice is paid up by your customer.
Typical Characteristics of Invoice Financing
|Financing Amount||70 – 90% of invoice value|
|Financing Duration||15 days – 1 year|
|Annualised Interest Rates||6 – 20%|
|Success Fee||2 – 5%|
|Revenue Requirement||S$100,000 – S$500,000|
|Cash Disbursement||3 days – 1 month|
Large firms and organizations such as governments usually have specialized processes to deal with one aspect of factoring, redirection of payment to the factor following receipt of notification from the third party (i.e., the factor) to whom they will make the payment. Many but not all in such organizations are knowledgeable about the use of factoring by small firms and clearly distinguish between its use by small rapidly growing firms and turnarounds.
Distinguishing between assignment of the responsibility to perform the work and the assignment of funds to the factor is central to the customer or debtor’s processes. Firms have purchased from a supplier for a reason and thus insist on that firm fulfilling the work commitment. Once the work has been performed, however, it is a matter of indifference who is paid.
Risks debt invoice factoring include:
- Counter-party credit risk related to clients and risk-covered debtors. Risk-covered debtors can be reinsured, which limit the risks of a factor. Trade receivables are a fairly low-risk asset due to their short duration.
- External fraud by clients: fake invoicing, misdirected payments, pre-invoicing, not assigned credit notes, etc. A fraud insurance policy and subjecting the client to audit could limit the risks.
- Legal, compliance and tax risks: large number of applicable laws and regulations in different countries
- Operational risks, such as contractual disputes
- Uniform Commercial Code (UCC-1) securing rights to assets.
- Income tax liens associated with payroll taxes, etc.
- ICT risks: complicated, integrated factoring system, extensive data exchange with client
In reverse invoice factoring or supply-chain finance, the buyer sells its debt to the factor. That way, the buyer secures the financing of the invoice, and the supplier gets a better interest rate.