Waiting for customers to pay their invoices can be frustrating and cause difficulties for you and your business. You’ve paid your employees, paid for materials, paid to keep your lights on, but now you have to wait for others to pay you. This can wreak havoc on your cash flow, leaving you high and dry when you’re hit with additional expenses. But there’s a light at the end of this financial tunnel. Those outstanding receivables are an asset and can be used to secure the funding you need with an invoice financing agreement to get your cash flowing back in the right direction.
LendRev can provide access to capital fast because we offer a direct path to the lending marketplace, empowering businesses like never before. Just complete one free application and LendRev gets to work, searching our network of lending partners where they compete for your business.
Fill out a single, free online application*
Speak with your personal funding coordinator
Receive same-day approval with proper documentation†
Receive the funding you need in as little as 24 hours‡
70-98% of the face value of submitted invoice(s), although some factoring companies have a maximum funding limit
30, 60 or 90 days – whichever matches the terms of the factored invoices
Not as important for this type of financing
Determined by borrower
As quickly as 1-3 days (factors without electronic applications take longer)
|Invoice Factoring||Traditional Term Loan|
|You don’t incur debt. You’re selling an asset.||You do incur debt.|
|Factoring companies may lower your factor rate after becoming familiar with your customers and their payment habits.||The amount of your loan, payment schedule, and interest rate will not change over the life of your loan.|
|Your business’s credit history is not as important as your customers’ credit worthiness.||Traditional lenders do require applicants to have a strong credit score.|
|The approval process can be completed as quickly as 1-3 days by factoring companies with electronic submissions.||Extensive vetting of your business is required, including financial statements and other personal information.|
|Your advance rate can be delivered within 24 hours of approval.||It can take 1-2 months to secure your loan and receive funding.|
|Additional fees may include charges for invoice processing, mailings, credit checks and late fees.||Additional fees include origination fees, closing costs and late fees.|
|The amount you receive upfront is determined by your customers’ credit history and their outstanding invoices. You have the option to determine when and which invoices to submit for payment. You will be charged a discount rate either weekly or monthly for the duration of the invoice’s term.||You receive the entire loan amount up front, and submit the same payment every month until the loan is paid in full at the end of the term.|
Invoice factoring allows you to sell your outstanding invoices and get paid upfront by a factoring company - instead of waiting 30, 60 or even 90 days for your customers to pay. The factoring company, sometimes referred to as a “factor,” advances you a portion of the invoice(s) called an “advance rate.” This amount can range from 70-98%, depending your customers’ credit rating, your industry and the face value of the factored invoice(s).
The factor retains the remaining portion, called the “reserve amount,” until your customers have paid in full. Their “factoring fee” and any additional charges are deducted from the reserve amount, and the remainder is returned to you.
Invoice factoring is also called invoice financing, accounts receivable financing and debt factoring.
First, the factoring company will verify your eligibly, making sure your industry is covered, that your company doesn’t have any significant legal or tax situations, and that your invoices are either B2B or B2G. Then they’ll review your customers’ creditworthiness and the terms of each submitted invoice. They may contact your customers directly to verify invoice amounts and assignments.
Based on your customers’ credit, the amount of the invoice(s), your industry and various other factors, the factoring company will determine how much to advance you and how much they’ll hold in reserve. If the terms are acceptable to both parties, you’ll sign a factoring agreement, specifying the maximum advance amount, included invoices and all fees and charges.
As with any contract, it is imperative you read your agreement carefully and understand the terms, and their implications, completely. If necessary, seek legal counsel.
The factoring company will provide you the advance rate and hold back the reserve amount. The advance rate is the amount the factor pays you upfront. At this point, the factor may send out a “notice of assignment” to your invoiced customers, explaining that the factor now owns the invoice(s) and will be responsible for collecting payment.
Some factoring companies follow a non-notification process. Rather than contacting your customers directly, they set up a PO box or a bank account under your company’s name, but under their control. You then communicate the new payment specifics to your customers.
Each method has its advantages. If you would prefer to let the factoring company handle collections, select an experienced, reputable company that will treat your customers with the same care and respect you would. This method can help protect your relationship with your customers, and they can rest assured knowing you have the necessary cash on hand to complete any outstanding orders.
If you’re not comfortable with a third party contacting your customers, choose a company that practices non-notification factoring. Your customers will continue to communicate with your company directly, and you’ll maintain control over the quality and frequency of those communications.
Depending on your factoring agreement, your customers will either pay the factoring company directly after receiving the notice of assignment, or they’ll direct their payments to the new PO box or bank account you’ve communicated to them. The original invoice terms will apply to the length of time your customers have to pay, typically 30, 60 or 90 days.
After your customer pays the outstanding balance on their invoice, the factoring company will deduct their fees from the reserve amount and pay you the remainder.
The costs associated with invoice factoring are typically lower than other forms of alternative funding and are determined mainly by the discount rate and length of the factoring period.
Discount rates are usually between 1.5-5% of the invoice value per month, and the rate can be charged on a weekly or monthly basis. Rates may drop after you’ve established a relationship with a factoring company, and they’re confident in your customers’ ability to pay.
The factoring period, which is the time it takes your customers to pay, will also impact your cost. Because discount rates are charged either weekly or monthly, the longer it takes your customers to pay, the more your costs will be for that factored invoice.
With spot factoring, you have the ability to pick and choose which invoices to submit to the factoring company. You’re able to base your decision on whichever parameters make sense for your company, such as invoice amounts, repayment terms, your relationship with your customer, or your knowledge of a customer’s payment history and creditworthiness.
Contract factoring requires you to submit a minimum amount of invoices each month. Additionally, some factoring companies may require that you submit all invoices from a particular customer.
How a client’s failure to pay will impact you will be determined by the type of factoring agreement you have: recourse, nonrecourse or partial recourse.
If you participate in a recourse factoring agreement, you will be responsible for the outstanding invoice amount if your customer fails to pay. Nonrecourse factoring does not hold you accountable when your customer fails to pay.
With nonrecourse factoring, you are essentially off the hook if your customer doesn’t pay. The factoring company will assume the loss or take additional steps to seek recompense from your customer. However, pay close attention to your factoring agreement, because there may be exceptions or your agreement may make provisions for partial recourse.
The difference between a recourse versus a nonrecourse factoring agreement could have major implications for your company. Be sure to carefully examine your factoring agreement, and seek legal advice if you have any reservations or questions.
If your company has B2B or B2G accounts receivable and you have no outstanding tax or legal issues, invoice factoring is a strong funding contender because it’s fast, flexible and doesn’t rely on your personal credit score. This type of financing works best for businesses looking for short-term funding.
Invoice factoring would not be the right option for companies who need large influxes of capital for major expenditures, like real estate purchases or large-scale expansions, or for companies that need longer repayment periods.
* In order to secure funding, LendRev requires at least three months in business with a minimum of $10,000 in monthly revenue.
† With the appropriate information and documentation available, it’s possible to have your application approved in as little as one hour.
‡ Many of our term loan and merchant cash advance providers can be very fast, providing funds in as little as 24 hours. SBA-backed lenders may take two weeks or more because Small Business Administration loans require significantly more documentation.