Businesses that are in need of quick cash and urgent help don’t always have the time or credit strength to apply for bank loans. Even when time restraints don’t pose a threat to the flow of cash, there is a bunch of other factors that can influence the decision of financial institutions to decline a loan request.
Where does that leave a business then?
Without the assets to settle their debts, businesses can face the danger of bankruptcy. So what’s the alternative to bank loans?
The answer is quite simple. It’s invoice factoring!
Wondering what this means? Here’s a short introduction to help you out.
The small business financing solution allows you to sell your invoices at a discount and get a lump sum cash advance in return. This model helps resolve our hard cash issues and assist you in dealing with your existing working capital. This is the best way to get some cash in hand quickly, so you can take care of your business expenses.
Invoice factoring improves cash flow, helping you keep your loyal customers without hindering your business operations. Even if other financial sources have disappointed you, this is one opportunity that’s always available for small businesses in need of financing. And since it requires no extensive profitability history and stellar business credit, invoice factoring is the ultimate tool to help you keep your business running smoothly.
Now that you know how invoice factoring works, you might be ready to apply. In order to assist you, this short guide will tell you all about the invoice factoring application process.
Comparing Factoring Costs
The invoice factoring rates are usually within the range 2% and 5% of the amount of the invoices you choose to factor. This rate is also known as the discount rate, but it’s important to remember that there are other additional fees that factoring companies may charge. They can be:
- Wire and ACH fees
- Renewal fee
- Origination fee
- Incremental rate fee
- Unused line fee
- Credit check fee
- Collection or overdue fee
- Service fee or lock-box fee
- Monthly minimum volume fee
If there are any additional fees, they will be included in your contract. It’s important for you to understand the terms of the contract and to ensure that you’re getting the best rate. Make sure you compare the fees and see where it leads from there. Review the contract carefully and take the assistance of a lawyer if the need arises. It’s also important that you evaluate all the options that you have.
Invoice Factoring Requirements
The first step is to see if you are eligible to avail this opportunity. There are a few requirements you need to fulfill in order to be considered a successful factoring candidate. They are as follows:
- Your business must issue invoices to other businesses (B2B).
- Your business must have a substantial turnover in receivables.
- Your invoices must have reasonable credit terms, typically 90 days or less.
- Your business must have customers who are creditworthy and have a history of paying invoices.
- Your business must the minimum sales volume required by the factoring company.
It’s important to remember here that the requirements might vary from company to company, so you’ll need to gather the information beforehand. Make sure you read the fine print and clear all your doubts away before you make a deal.
Avoid Disqualifying Issues
Most factoring applications proceed quickly if the client company is well prepared and does not have liens, legal problems, or tax problems. Actually, many factoring companies can implement a factoring line in a week or two if everything goes smoothly. However, a number of things beyond the control of the factor could derail an application.
- Business and merchant cash advances
- Federal tax liens
- Past due payroll taxes
- Criminal background
- Current or potential litigation
Existing liens on your accounts receivables post a real threat to factoring companies. Factoring companies want to be in a first lien position on your receivables. Business and merchant cash advance liens must be cleared before a factoring company will consider your application. Bank loans also pose a hindrance to securing factoring services. Sometimes factoring companies can work with existing lien holders to gain a first position on your receivables.
Unpaid federal tax liens also pose significant risk for obtaining invoice financing. Federal tax liens always take precedent if a company defaults on its financial commitments or proceeds into a bankruptcy. Factoring companies may help you resolve tax issues, sometimes even loaning you money to pay them off.
A criminal background can be devastating to creditors, even factoring companies. Be very transparent and upfront when discussing your criminal history with a factoring company. Here, honesty and communication is essential to show that you are worthy of consideration, even if you have a past record. Don’t expect a factoring company to approve your application, if you don’t bring up your record before them having to find it on their own.
Personal or company litigation can be a real cause for concern when trying to get invoice financing. You must be prepared to explain your situation and convince the factoring company that the potential liability isn’t material or significant.
The paperwork requirements for the process can help you prove the legitimacy of your business and the assets you own. With a strong accounts receivable portfolio on your hands, you can improve your chances of getting an approval.
Here is a list of documents you would need to submit with your application. Remember that the requirements might vary from company to company. Get the required information beforehand so you can submit an application that puts up a strong case for you.
- Application with standard personal & business information
- Details of outstanding invoices to be funded, as well as supporting documentation
- Recent income tax returns and bank statements (personal & business)
- Accounts receivable aging report
- Accounts payable aging report
- Detailed list of customers
Once you’ve provided the required documentation, the invoice factoring company will conduct their research in order to qualify your business for approval. If you follow the above steps, your chances of qualifying are very good. As soon as they are done with your background check and evaluating your application process, you’d receive a call with the good news. Remember, if you or your business has credit issues, you can still qualify for invoice factoring. The factoring company is more concerned about the creditworthiness of your customers.