First-Time Factoring: A Simple 5-Step Guide to Working with Receivable Financing Companies

First-Time Factoring: A Simple 5-Step Guide to Working with Receivable Financing Companies

You can have a successful and even profitable business. But the number of customers you have and your annual revenue aren’t the only metrics that matter. A top priority for business owners is cash flow, so they can access working capital and run the day-to-day operations. Yet cash flow is often one of the most common challenges that businesses face.

There are various cash flow solutions available, including accounts receivable factoring and accounts receivable financing (AR financing). Both options leverage your unpaid invoices, turning them into upfront cash. So, you can access funds now without waiting for your customers to pay.

These options can help business owners improve liquidity without taking out traditional business loans. However, the convenience and speed can also come at a cost. In this guide, find out what to consider and how to work with receivable financing companies.

What Are Receivable Financing Companies?

Receivable financing companies offer business owners asset-based lending options, such as invoice factoring and accounts receivable financing. Both financing solutions allow businesses to turn outstanding invoices into a cash advance based on a specific percentage of the total invoice value.

Using invoice factoring, businesses sell unpaid invoices to a third-party company, which then takes over and collects payments. With accounts receivable financing or invoice financing, the business maintains ownership of the invoices and repays the lender after the customers pay.

Receivable financing companies charge a fee based on the invoice value and the length of time it takes customers to pay. However, it depends largely on the lender, the customer’s creditworthiness, and the payment terms.

Through invoice factoring, the company will send the business the remaining balance once the customers pay the invoice, after subtracting fees. Through AR financing, the business repays the lender after the invoices are paid in full.

It’s important to note that receivable factoring rates and accounts receivable loan rates are typically structured as fees, rather than traditional interest rates you might see on other loan products. However, when those fees are converted into an Annual Percentage Rate (APR), it could be in the double-digits.

Common Reasons Businesses Use Receivable Financing Companies

Small business owners have a range of financing options to consider when they need access to funds. While term loans, equipment financing, and SBA loans are available, they may not be the best option for every business.

Accounts receivable factoring and accounts receivable financing can leverage your existing invoices and turn them into accessible funds. Here are some common reasons you might want to work with receivable financing companies.

• Eligibility: It may be easier to qualify for accounts receivable financing than traditional bank loans. Unpaid invoices act as collateral to secure the loan. Plus, lenders typically put more emphasis on your customers’ credit rather than your own.

• Payroll: Cash flow gaps make it challenging for businesses to cover major operating expenses like payroll. Receivable financing ensures that employees receive payment on time, reducing the risk of potential staffing issues.

• Inventory: Growth opportunities can come quickly, and you must be ready. You might need to purchase more inventory to meet the moment. If you don’t have enough cash on hand, accessing funds from receivable financing companies can help you meet the increased demand without any delays.

• Cash flow: Net 30 or Net 60 payment terms could mean waiting weeks to get paid. All the while, your business expenses continue. Having access to funds that are secured by your invoices can help with immediate cash flow needs. Whether you’re dealing with seasonal slowdowns or rapid growth, having the capital available can be a major lifeline.

How to Work with Receivable Financing Companies

To get started, here’s a simple five-step guide on how to work with receivable financing companies.

Step 1: Determine If Receivable Financing Is the Right Option for You

The first step is to determine whether this type of financing is right for your business. Start by evaluating your funding options. Consider factors like fees, accessibility, credit requirements, and speed of funding. If you may not qualify for traditional business financing options and need quick access to capital, receivable financing could be a good solution.

Step 2: Compare Receivable Financing Companies and Rates

Next, compare a minimum of three receivable financing companies and their pricing structures. Service providers vary widely, so when reviewing their offerings, consider the following:

• Advance rates: Receivable financing companies may provide a percentage of your total invoice value upfront. Consider the funding amount so it matches your business needs.

• Financing services: When comparing receivable financing companies, review the types of services they offer. A provider may offer accounts receivable financing or factoring (sometimes referred to as invoice financing and invoice factoring), or both. With AR financing, you retain control over customer payments. With invoice factoring, the financing company often takes over payment collections from your customers.

• Fees and rates: Make sure you understand the fee structure and how it translates into an APR. This is key, as it will impact the total cost of borrowing.

• Total costs: Fees are typically per period, which can impact your total costs. Consider how long your invoices remain outstanding.

• Funding speed: When comparing receivable financing companies, compare funding speed. Typically, this can be a few business days, but it can vary.

• Contract terms: Check minimum requirements, early termination fees, and flexibility in choosing which invoices you want to finance.

• Customer relationship: Factoring companies may communicate directly with your customers, while AR financing companies typically remain in the background, allowing you to maintain complete ownership of invoices and customer relationships.

• Industry reputation: When comparing receivable financing companies, you want to work with providers with a proven track record. Research the company's history and customer reviews on the Better Business Bureau (BBB).

Step 3: Submit Application with Supporting Documentation

After comparing receivable financing companies and choosing a provider, the next step is to submit your application with supporting documentation.

You’ll typically need to share information about your business, customers, and provide copies of your outstanding invoices. In some cases, the company may ask for financial documents such as recent bank statements and accounts receivable aging reports.

Once you submit your application, the provider will review your information and invoices to determine your eligibility.

Step 4: Upload Unpaid Invoices to Get Financing

If approved, the next step is typically uploading your unpaid invoices. Receivable financing companies generally require you to provide invoices sent to creditworthy customers who are in good standing. Depending on the provider, you may need to confirm that services have been rendered or goods have been delivered.

If you choose invoice factoring, which sells your invoices to a factoring company, the provider will notify the customers and handle the collection of payment. If you choose accounts receivable (invoice) financing, you continue to manage customer payments on your end.

After the company verifies the invoices, it will determine the advance amount and begin the funding process.

Step 5: Review Payment Terms, Fees, and Final Settlement

After you upload your invoices and receive funding, it’s important to review the payment terms and potential fees. In general, providers charge fees based on a percentage of the invoice value and how long it takes customers to pay the remaining balance.

Fees can vary by company and between accounts for receivable financing and factoring. Under an accounts receivable financing agreement, you retain control of invoices and the customer payments. Once the invoices are paid in full, you’ll repay the lender based on the terms of your agreement.

If your invoices have been sold to an invoice factoring company, it will collect the payments from the customers. After the invoices are paid, the provider will deduct applicable fees and send you the remaining balance.

Be sure to research any additional fees and understand how the company handles late payments. Taking these steps can help you avoid potential issues down the line and ensure you get the most out of receivable financing.

Final Thoughts

If a traditional loan is out of reach, you may be able to leverage the power of your invoices and turn them into a valuable funding option. Working with receivable financing companies can improve your cash flow and provide quick access to working capital.

Whether you decide on accounts receivable financing or factoring, make sure you do your research. Be sure to review fee structures and payment terms to get the most out of this financing option.