More than 30% of small-to-mid-sized business owners say they’ve experienced problems with unpaid or late invoices. This kind of issue can affect payroll, supplier payments, and your investment in your company. What if you could sell your invoices through a factoring arrangement to collect cash immediately?
Keep reading to learn more about what industries benefit from invoice factoring.
What Is Invoice Factoring?
Invoice factoring is a financial resource for businesses. It enables companies to infuse cash into their accounts by selling discounted invoices to a third party.
In this way, you can access the money you need immediately for invoices that are due for up to 90 days. This scenario is a better alternative compared to waiting for customers to pay invoices.
Invoice factoring is highly beneficial for some businesses that need immediate cash to pay bills. Alternatively, you may need to make a large purchase for something important such as inventory.
Benefits of Invoice Factoring
When your business needs cash to fund inventory purchases, you may find invoice factoring helpful. Also, you may need to meet payroll and have invoices due in less than 90 days from customers in good credit standing. In that case, you can turn your invoices into immediate funds to better manage your cash flow.
If you have good credit, you may not need invoice factoring. Likewise, factoring may not serve you well if you have a low debt-to-income ratio. Moreover, if you don’t need cash within a week, you most likely don’t need invoice factoring.
Invoice Factoring Cost and Fees
Companies charge a fee for invoice factoring. In this way, a factoring company makes a profit from advancing funds. You could also think of this fee as a discount rate.
Factoring fees can range anywhere from .75% to 5%. The fee will climb over time the longer it takes your customers to pay their invoices.
Suppose you have a $30,000 invoice, and the factoring fee is 1%. In that case, you’ll pay a $300 factoring fee.
However, this 1% rate can increase to 2% on a weekly basis. By the third month, you could pay as much as 5% in factoring fees.
Factoring vs. Financing
Invoice factoring and invoice financing are both ways to fund your business when you need cash. They can help you:
• Buy inventory
• Make payroll
• Pay vendors
Yet, these two business financing methods differ in one important way. Invoice factoring is a sale, while invoice financing is a loan.
With invoice financing, you must make loan payments, and you’ll still collect payments from your customers. You’d apply for a bank loan and repay it just like any other loan.
With factoring, however, you’ll sell your invoice to a factoring company in exchange for money. With this method, the factoring company now owns the invoices, and they’ll collect the payments from customers.
Industries That Benefit from Invoice Factoring
A growing number of companies are discovering the benefits of invoice factoring. By selling their invoices at a discount, they can generate cash flow quickly.
By working with a factoring company, you can cut down on wait time for invoice payments drastically. You’ll no longer have to wait 60 or as much as 90 days to receive payments on invoices.
From small businesses to midsized companies, many industries benefit from using invoice factoring. Let’s have a look at a few industries that benefit the most by selling their outstanding invoices.
Cleaning Company Invoice Factoring
If you’ve never owned a cleaning company, you might think that it’s a relatively easy business. In contrast, cleaning company business owners constantly juggle cash flow demands.
For instance, they must pay employee and supplier expenses on time and consistently. However, many building management companies demand 30 to 60 days to pay their invoices.
The gap between invoice payments and expenses often causes considerable problems for cleaning companies. In the cleaning business, you must budget carefully and stay on top of outstanding invoices. Still, some cleaning companies must solve cash flow problems with invoice factoring.
Commercial Food Service Invoice Factoring
The commercial foodservice industry is one of the fastest-growing spaces in business. These companies work with corporate accounts.
Corporations typically demand 30-to-60-day payment terms. This circumstance creates a considerable financial challenge for small and growing food companies that can’t wait as long to get paid. Unless these companies can find some way to manage working capital, their finances can spin out of control.
Invoice factoring is one way that commercial foodservice companies manage this kind of issue. It helps by giving them advance access to cash on invoices for credit-worthy yet slow-paying clients.
Construction Invoice Factoring
There are many reasons why a construction company may have a cash flow shortage. For example, a construction company may have:
• A sudden increase in demand
• Increasing material costs
• Seasonal slowdowns
• Slow-paying customers
All of these conditions can result in poor cash flow.
Often, construction companies only receive 50% of project costs upfront. However, material prices can rise, and projects can take longer than planned. Fortunately, construction companies can make use of invoice factoring until they complete a project.
Distribution and Wholesale Invoice Factoring
The biggest obstacle faced by wholesale and distribution companies is cash flow. Many of these companies plan their budget carefully.
Still, they can find themselves in the middle of a crippling cash crunch. For example, these companies might have money shortfalls due to:
• Advertising costs
• Legal fees
• Overhead costs
• Supply expenses
• Utility bills
Slow seasons and economic fluctuations can also make it hard for companies to maintain steady cash flow. With invoice factoring, however, they can fulfill orders, access better pricing, and keep their operations going through tough times.
Freight Broker Invoice Factoring
The freight broker industry is financially rewarding. However, it isn’t without challenges.
One of the biggest issues faced by freight brokers is that they must pay expenses quickly. However, they receive payments slowly.
In this industry, it’s critical to stay on top of cash flow. If not, growth is nearly impossible.
Invoice factoring is one way to overcome this issue. It can help freight brokers make up for slow-paying invoices.
Many commercial shipping clients pay invoices in 30 to 60 days. With invoice factoring, freight brokers can access the funds needed to pay drivers and carriers. In this way, they can improve company cash flow.
Government Invoice Factoring
Government contracts are both good and bad. They can give your company a massive boost in revenue. However, working with government contracts can also put your company in a very challenging cash flow situation.
A government contract is a game-changer for many businesses. At the same time, government agencies don’t pay invoices quickly, usually taking 60 to 90 days to settle accounts.
When working with these kinds of contracts, it’s no use withholding work until accounts get brought up to date. The agency will simply find another vendor. With invoice factoring, however, you can get upfront payments for your government contracts so that you can meet company expenses on time.
Health Services Invoice Factoring
The health care industry also struggles to maintain cash flow. Often, insurance companies process claims slowly. This circumstance can affect the smallest medical facilities to the biggest hospital networks.
Health care providers also face increased drug prices. They must also bear the expense of keeping up with continually changing regulations. These circumstances together can create a gap in working capital, which some care providers resolve with invoice factoring.
Manufacturing Invoice Factoring
Most manufacturers purchase large amounts of raw materials. They also usually have a large staff. As a result, it’s vital for them to keep cash on hand.
Manufacturers never know when they may need to cover an unexpected cost or repair. If a major piece of equipment gets damaged or needs replacement, this circumstance could shut production down completely.
A work stoppage could result in considerably stalled orders. It can also cause existing raw materials to go out of date.
With invoice factoring, however, manufacturers can overcome these kinds of issues. They can access the cash they need to fix cash problems quickly.
Oilfield Services Invoice Factoring
One of the top benefits of working in oilfield services is that many customers in this industry have excellent commercial credit. They also pay very well. As a result, the oilfield services industry is ideal for many entrepreneurs.
Yet, rapid growth sometimes creates cash flow problems in this field, especially for smaller companies. Again, many large companies wait 30 to 60 days to pay invoices.
Oilfield companies may not always have the reserves to cover expenses while waiting for payments. With invoice factoring, however, these firms can access cash immediately.
Professional Services Invoice Factoring
Professional service providers often work on high-budget projects with slow-paying customers. Like many other industries, they may work with clients who don’t pay invoices for 60 to 90 days.
This scenario can create a serious cash flow issue. Professional service providers who face these issues might include:
• Financial advisors
• Security services
• Other business services
Often, these kinds of companies find themselves with a mountain of invoices but no working capital.
As a result, they’re unable to operate efficiently or take on new projects. With invoice factoring, they can bridge cash flow gaps.
Staffing Firm Invoice Factoring
Staffing firms often work with invoice factoring companies. They must maintain a consistent cash flow to pay employees. Employees are their biggest asset.
This kind of company may recruit for a wide range of positions. Also, staffing agencies work across many industries.
Because of these circumstances, staffing agencies may receive invoice payments in a wildly unpredictable pattern. A long gap between invoicing and receiving payments can create cash flow problems quickly. Resultantly, many staffing agencies work with invoice factoring companies to resolve their cash flow issues.
Trucking Invoice Factoring
Trucking companies have many expenses to pay before delivering freight. These expenses might include:
• Drivers’ pay
At times, trucking companies may also need extra funds for vehicle maintenance or to reimburse suppliers.
Now, the trucking industry is evolving to accommodate e-commerce. As it does, carriers must adjust their routes and buy new equipment. They need trucks to fulfill the increased demand for short-route and last-mile trips.
With invoice factoring, trucking companies can cover daily expenses. They no longer need to wait on the payment of outstanding freight bills to keep things moving forward.
Invoice Factoring for Small Business
You may own a small business with slow-paying customers. Alternatively, you may sometimes find you have limited cash flow.
Like many other businesses, you can sell your invoices for clients with good credit whom you expect to pay in 30 to 90 days.
In these instances, you can turn to invoice factoring rather than borrowing from a lender or bank. You can sell your unpaid invoices to access needed cash quickly.
Now, the factoring company owns the invoice. After selling your invoices, the factoring company will collect payment from your customers or clients.
Single Invoice Factoring
With single invoice factoring, you can receive an advance on your outstanding invoices. Suppose you’re waiting for a large payment from a customer. However, you need access to money quickly.
In that case, you can factor your invoices. However, single invoice factoring differs from standard factoring.
As its name implies, with this kind of factoring, you’re only contracting for one invoice rather than a range of invoices. You can use single invoice financing to factor outstanding payments on an as-needed basis.
Sometimes, however, the terms of this kind of agreement vary. In some cases, you must still collect payment from your clients. In other cases, a financing company might take over this responsibility with single invoice factoring.
Learn More about Keeping Your Books in the Black
Hopefully, our guide to invoice factoring has helped you discover an option for improving your company’s cash flow.
TaxSaversOnline can help you learn more about maintaining a healthy cash flow for your business. Please feel free to visit our Finance section to learn more about keeping your company in the black.
How Do Bank Loans Affect the Nation’s Economy?
7A Loans: The Pros and Cons You Should Know About
SBA 504 Loans: An Ultimate Guide