What is Invoice Factoring?

Slow-paying clients can stall your business operations and plans for the future — bills, payroll, investment in technology or equipment, or even hiring more staff to help you scale your business. We have a solution: invoice factoring.

A traditional, high-interest bank loan can be very expensive, not to mention the immediate debt incurred with obtaining one.

What do you do when clients are taking 30, 60 and even 90+ days to pay you for work you completed a long time ago?

This is where invoice factoring or invoice discounting can help a business get the immediate cash advances on its outstanding invoices. Learn all about how invoice factoring works from the tips below.

What is Invoice Factoring?

You may be thinking, “What is invoice factoring—and how can it be beneficial for my business?” You simply sell your accounts receivable (invoices), minus a small discount, to an invoice factoring company. After checking out the creditworthiness of your invoiced customer, factoring companies advance up to 100 percent of the invoice, providing immediate cash flow for you to use for your business needs.

In a recourse factoring agreement, you’re likely to see 100 percent advanced, while a transportation company with a non-recourse factoring agreement would likely see a 90% to 97% advanced, and a business factoring agreement would likely see up to 95% advanced.

And when your customer pays the invoice, the factor remits the balance, minus a fee, to your business.

So instead of waiting 30 to 120 days—or even longer—to receive your customer’s payment, get your invoice funded within 24 to 48 hours.

To learn more about how invoice factoring works, feel free to contact us—we’ll be happy to address all of your comments, questions and concerns. We look forward to hearing from you!

Pro Tip

With invoice factoring, approval is quick and easy. In most cases, you can get paid for your invoices in 24 hours.

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How does Invoice Factoring Work?

With an invoice factoring service, you don’t have to wait for your clients to pay their bills in order to pay your vendors and employees, order equipment, and cover other business expenses. Invoice factoring companies like Triumph, formerly known as Triumph Business Capital, will pay your unpaid invoices in as little as 24 hours, so you can get the working capital you need, and get back to doing business.

Pro Tip

Invoice factoring helps relieve payroll pain, giving you capital to meet weekly, bi-weekly, or monthly payroll. Need to stock up on supplies? No more waiting for your customers’ payments so you can purchase supplies or pay vendors.

In short, invoice factoring is the purchasing of your accounts receivables – your unpaid invoices no older than 30 days old. You do the work, you sell us the invoice, we advance you up to 100 percent of the invoice immediately, and we collect the money from your client.

That’s it! No more invoices to process, no waiting for clients to pay, and best of all immediate cash in hand—invoice factoring simplifies your bookkeeping experience and helps you get paid on time every time.

According to the Wall Street Journal, “The factor advances most of the invoice amount—usually 70% to 90%—after checking out the credit-worthiness of the billed customer. When the bill is paid, the factor remits the balance, minus a transaction (or factoring) fee.”

Pro Tip

Stressed about payroll and other recurring payments? Invoice factoring can take the stress out of meeting all your first-of-the-month commitments.

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How Invoice Factoring can Improve Cash Flow Forecasting

Business owners know one of the keys to keeping the doors open is planning. Two powerful business tools that can help small business owners plan for upcoming expenses like taxes, salaries, and insurance are cash flow forecasting and invoice factoring. They can even help businesses get paid faster.

Pro Tip

Since your credit score plays a key role in the viability of your business, it’s important to keep a watchful eye on this number. At the very least, get a free credit report each year and make sure the information is both correct and current.

What is Cash Flow Forecasting, and why is it important?

As any business owner knows, the best-paying client isn’t always the fastest-paying client. However, waiting too long for payment can cause cash flow problems that make it difficult to pay debts, including payroll. Add unexpected expenses to the equation, and your company can quickly become insolvent.

Cash flow forecasting is method of predicting your company’s future financial position based on anticipated accounts receivable and expenses. You can use cash flow forecasting to determine your financial position at any given time — and to effectively prepare for upcoming costs.

Some expenses — such as utility bills, insurance, and payroll, are generally the same each month. Other costs, such as unexpected repairs or a lawsuit, may take you by surprise. While cash flow forecasting can’t prepare you for every financial scenario, it can help you be better prepared for potential shortfalls.

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What is the difference between invoice discounting and factoring?

Essentially they’re the same. Factoring goes by various names, such as invoice discounting or accounts receivable financing, but the transaction itself is identical. The factoring company purchases the invoice from the seller, whether that’s a broker or a carrier. Notice that this is not an invoice loan, it’s a sale. The factoring company assumes full responsibility for billing and collecting the specific debt.

The benefits of factoring and invoice discounting are exactly the same:

• You can grow your business or lessen cash flow problems when the cash is freed up.
• Within 24 hours you can expect the release of up to 90% of the value of outstanding invoices.
• You can increase your power to negotiate discounts with the supplier invoices paid promptly.
• You do not need other assets for funding to be secured.
• With your turnover funding levels will increase.
• You can expect competitive pricing with both services.
• You can get excellent business advice from Factoring and invoice discounting providers.

Invoice factoring will give you complete control over your collection service. This allows you more time to focus on other areas of your business.

Invoice discounting also provides peace of mind. You can rest assured knowing your customers are not aware of any issues with cash flow you may be having.

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What is the difference between recourse and non-recourse factoring?

As there are varying client needs, there are various types of invoice factoring.

With non-recourse factoring, the factor assumes all the risk of collecting the debt. That’s a lower-risk option for small businesses that can’t absorb the cost of unpaid invoices, but it does cost slightly more than recourse factoring.

Larger corporations often favor recourse factoring because, if a customer fails to pay, they can afford to return the funds they received from selling the uncollectible invoice to the factoring company.

Aside from the cost differential between the two, there are times when the cost differential is not justified by the credit risk being taken.

For example, if you’re selling to WalMart or the Federal Government, the chances of either one not paying because of credit reasons are quite small. Thus, paying a premium for non-recourse starts to look a little less attractive. If you do elect for non-recourse factoring, pay special attention to the Security Agreement that you’ll be required to sign and make sure you ask the factor to specifically go over when you will be covered and when you will not be covered from credit risk.

Pro Tip

Factoring companies assume insolvent risk with non-recourse invoice factoring, and your business reduces bad debt while increasing cash flow, even if your customer never pays the invoice.

With a non-recourse invoice factoring agreement, if your customer pays the invoice in 45 days or less, your total invoice factoring cost with Triumph would average approximately 3.9% of the invoice. However, different factoring companies determine what invoice factoring fees they’ll include, and these fees can drive up the cost of their services.

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How much does invoice factoring cost?

Invoice factoring fees vary from company to company, so check with your invoice factoring service before getting started.

Application/Due Diligence Fee

Some factors charge application and due diligence fees and some do not. Those that do not may recover this upfront expense by increasing the initial invoice factoring fees. This fee varies highly from companies to companies and can cost anywhere from zero to thousands of dollars.

Closing Fee

Some factoring companies retain a small percentage of each invoice. Triumph, however, does not charge a closing fee.

Monthly and Termination Fees

Some companies may require you to sell a certain amount of your invoice each month and sign a long-term contract. If the monthly target isn’t met, a minimum monthly invoice fee will be charged. Terminating the contract early can trigger a cancellation fee—typically a percentage of your line of credit.

Discount Fee

The cost of paying for your invoices in advance can vary anywhere from 1.5–5% of the invoice value each month. This wide disparity is yet another reason to check with your factor before jumping into a relationship.

Invoice Factoring Fee

If your invoices go beyond the 30–45 days covered by the advance discount fee, you can expect an additional charge of 2–3% or more for every 30 days that the receivable is outstanding beyond the original 30 days. Some factors may prorate the fee daily, while others may charge on a 10-day basis.

Triumph’s factoring fee depends on your unique factoring business agreement. Our invoice factoring specialists considered whether you’ve chosen recourse or non-recourse factoring, the credit quality of your customers, and more.

Regardless of your agreement or if you’re on a non-recourse or recourse program, our fee structure and schedule is transparent

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Can invoice factoring save you money?

Consider this simple illustration. You decide invoice factoring is the best option for your business, so you convert your invoices into cash instead of waiting a month or more to get paid.

Pro Tip

Invoice factoring gives your business the cash you need quickly and easily.

With immediate cash in hand, you can stop worrying about how you’re going to pay your bills and get on with growing your business. And when you pay vendors more quickly, you can take advantage of their discount offers, which saves you money. You’ve not only gotten invoice collection off your plate, you’ve paid your bills and saved money in the process—and that’s good business.

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Factoring Invoices Pros and Cons

The pros

You get money when you need it.

Invoice factoring is fast cash in the bank to help cover day-to-day expenses, restock materials, pay staff—or just about anything you need. The alternative? Wait . . . wait . . . wait . . . and then wait even longer—30 days, 60 days, or more—to get paid by clients. But with fast cash in hand, you can keep loyal customers on longer payment terms.

Your invoice factoring company grows with you.

Compare invoice factoring to a traditional bank loan and there’s no competition. Bad credit? Limited operating history? Loan declined? No problem. The best invoice factoring companies base their decision on the quality of your customers’ credit, not your own credit or business history. You get cash based on your invoices, not your company’s net worth.

Pro Tip

The last thing a growing business needs is to incur more debt. Invoice Factoring allows you to get the capital you need when you need it and without taking on a loan.

The cons

You might pay higher fees than traditional financing.

Invoice factoring can have higher fees than traditional financing—but it’s a small price to pay for peace of mind. Triumph’s fee takes into account the credit risk associated with your customers and the time it takes them to pay their invoices. In fact, invoice factoring provides cash flow that meets your business where it is today and can grow as your business grows because it’s based on your actual account receivables.

Also, the fee includes an entire back office team that invoices and collects on your clients, allowing you to focus on your business. How much is adding a team of collection and credit professionals worth to you and your peace of mind?

Always transparent, always fair, Triumph, formerly known as Triumph Business Capital offers options that match each client’s financing needs without — most importantly — incurring debt.

Your factor may work directly with your customer.

The best invoice factoring companies work directly with your customers to collect payments on your invoices. You’ll need to ensure that the factoring company you choose is ethical, fair, and respectful. Triumph is a proud member of the International Factoring Association (IFA), and strictly adheres to the IFA’s code of ethics. We ensure a smooth transition for both you and your customers.

Your financing depends on your customer’s credit.

Lastly, recognize your customer’s bad credit may derail your financing. A factoring company may reject your invoices to any customer that isn’t creditworthy.

3 questions to consider

How do you know if invoice factoring is right for you? Ask yourself these three simple questions.

1. Can my problem be fixed by factoring?
2. Can I cover the cost of factoring and still make a profit?
3. Are my customers creditworthy?

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What to consider when choosing the best invoice factoring company

Invoice factoring is a saving grace for many industries, from transportation and staffing to small and mid-size businesses as well as government contractors. In fact, invoice factoring can offer welcome financial relief if you’re just starting a business, have bad credit, can’t get funding from banks, or are at risk of losing your business.

So what should you look for when choosing a factoring company?

Now that we’ve broken down the fees, let’s get into specifics. While not all factors are entirely transparent with their pricing, Triumph believes in being as transparent as possible, from the initial conversation through the funding process.

Pro Tip

When you process all your invoices with an invoice factoring company, you can end late-payment worries, and relinquish all those collection hassles to them..

We believe getting paid shouldn’t be the hardest part about your job. Since 2004, Triumph has helped over 7,000 small and mid-size businesses in the U.S. manage their cash flow.

As your partner, we’ll factor your invoices so you can get paid today—and make your financial challenges a thing of the past. And in addition to helping you manage cash flow through invoice factoring, we offer a host of other business services through our parent company Triumph Financial to help you do what you do best.

Triumph is committed to helping businesses manage cash flow and so much more. End late payment worries and slow cash flow problems. Factor your invoices and get paid today with Triumph.

It’s your cash, get paid today!

Pro Tip

With invoice factoring, you can expand operations, hire more staff, or develop a new product line. Your customers’ unpaid invoices no longer hold your business hostage, stifling your progress.