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 Factoring?
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 can really be that simple.
Alternative Solutions May Be Enticing But…
Traditional lines of credit from a bank can be economical and are great if you can get them. This usually applies to many larger firms with solid cash flow. However, young, smaller companies or companies 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.
If you don’t know much about them, Merchant Cash Advance loans sound great up front. With little to no menacing underwriting, you can get quick cash! But here’s the catch…
MCAs frequently come with hidden fees. Plus, they’re often very expensive, they draft directly from your bank accounts, and they add debt to your company. In many cases, you could find yourself stacking MCA loans on top of one another just to make ends meet. This can result in outrageous and crippling interest fees that could kill your business.
All Factoring Companies are NOT Created Equal
Factoring is, in fact, often a better solution. But it’s important to recognize all factoring companies are different. Do your homework before engaging a factoring firm. Understand the products they offer and know what to expect about how they operate.
Basic questions to ask when considering factoring:
- “Do you offer recourse or non-recourse factoring? What is the difference in pricing?”
- “Do you offer spot factoring?”
- “Do you require our company to factor all invoices? 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?”
- “What happens if my debtor is not willing to work with a third party?”
- “What are ALL the fees I will be paying?”
>> IN-DEPTH READING: How to Choose the Best Factoring Company for Your Business
Typical “Additional Fees” When Factoring
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 on 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.
>> IN-DEPTH READING: All Factoring Fees You Must Understand About
For more information about invoice factoring, contact us or give us a call at 865-670-2345. We will be happy to answer.Back to blog