At some point, all business owners suffer from growing pains resulting in a cash flow shortage.
Additionally, every company has clients who pay slower than the agreed-upon payment terms. This often results in vendors or suppliers breathing down your neck for payment. When you’re feeling these pains, a great solution for immediate and positive cash flow is invoice factoring.
What is Invoice Factoring?
Invoice factoring is most often used to fund the expansion of rapidly growing businesses. You have to go through a moderate underwriting process, but most of the focus is on your client, their creditworthiness and their ability to pay.
Factoring is flexible. It’s there when you need it for your next project, and most of all, it doesn’t generate debt or long term obligations, which can weigh down the balance sheet.
Sell your invoice to a reputable firm. You’ll get immediate cash flow for your completed work and the factoring company waits to be paid by your client for a fee. It’s really that simple.
Alternative Solutions May Seem Enticing
Traditional lines of credit from a bank can be economical and are great when you can get them. This usually applies for many larger firms with solid cash flow. However, young, smaller firms and firms with cash flow struggles are more likely to be considered not bankable.
If you are fortunate enough to get a line of credit, you may find they’re capped and often cannot grow with your firm. This leaves you tied in a knot trying to figure out how to fund your growth.
Merchant Cash Advance loans sound great up front. How inviting – with little to no menacing underwriting, you can get quick cash!
But here’s the catch…
MCAs frequently come with hidden fees. They’re often very expensive, they draft directly from your bank accounts, and they add debt to your company. In many cases, you find yourself stacking one on top of another just to make ends meet. This can result in outrageous and crippling interest fees.
All Factoring Companies are NOT Created Equal
Factoring is, in fact, a great solution. But it’s important to recognize all factoring companies are different. Do your homework before engaging a factoring firm. Understand the product they offer and know what to expect about how they operate.
Important questions to ask can include:
- Do you offer spot factoring?
- Is better pricing available for contract or volume accounts?
- Do you have a monthly minimum? If we do not meet that minimum, how much will I be charged?
- Do you require our company to factor all invoices? If so, what happens if my debtor is not willing to work with a third party?
- Do you offer recourse or non-recourse factoring? What is the difference in pricing?
Watch for Hidden Fees Before You Sign
Quotes or term sheets can be deceiving. Look under the hood for hidden fees. Only a few factoring companies offer a one-time rate based upon the invoices you fund.
Many factoring companies will at least charge a startup or origination fee, underwriting fee and early termination fee. Be sure to look for some of the following fees before you sign on the bottom line.
- Origination Fee
- Underwriting Fee
- Late Fee
- Termination Fee
- Wiring/ACH Fee
- Due Diligence Fee
- Annual Review Fee
Next time you are looking for a factoring company and get a quote, don’t be afraid to ask if there are any other charges or “hidden fees”. Be sure to read over your term sheet and contract thoroughly and add up all the fees before making your final decision.
For more information on reputable invoice factoring for one fee, contact CapitalPlus or give us a call at 865-670-2345.Back to blog