Single invoice factoring is the strategic method of raising financial resources against individual invoices. Since cash is locked up and tied to an asset, in this case a receivable, the procedure frees it up as it enables a business to receive money in advance on a single outstanding invoice before it matures.
Sounds confusing? To elaborate and help you understand further, allow us to put it in contrast to traditional credit, specifically a bank loan.
- Classification – It is a type of liability transaction. In other words, a bank loan is a type of debt or borrowing and therefore an obligation towards the financial provider.
- Amount – The amount of loan depends on the amount applied for which may be more or less depending on the borrower’s creditworthiness.
- Cost or Fees – It involves interests, oftentimes compounded, to be paid on top of the principal in equal installments.
- Length of Contract – A type of long term loan, it can span from at least five years to thirty depending on the terms of the contract.
- Collateral Requirements – Collateral is oftentimes always involved which can be any of the company’s or its owners’ assets. Properties would be one. It is used as a form of security against the loan in the event of nonpayment.
- Application Process – It takes weeks to months for bank loan applications to be processed. They are very meticulous and comes with a number of requirements.
Single Invoice Factoring
- Classification – It falls under the category of asset transactions. This means that it is not a debt and is therefore recorded as a decrease in trade receivables coupled by an increase in cash.
- Amount – It is equivalent to the value of the invoice being subjected to the method.
- Cost or Fees – The fee is a onetime deal which is often deductible against the total value advanced by the business. It is equivalent to an agreed upon percentage from both parties.
- Length of Contract – It is a onetime deal and does not involve lengthy contracts.
- Collateral Requirements – Because it is not a debt, there are no collaterals involved.
- Application Process – Considered to be mighty swift, single invoice factoring can be processed quickly in contrast to other financing methods available in the market. Majority of providers can approve and release cash within at least a day’s time to at most of a few days.
Factoring companies are one of the financial institutions that entrepreneurs head to when they need extra cash and capital for their businesses. The said entities provide services which we refer to as invoice or receivables factoring. This method allows entrepreneurs to sell the right to collect against their invoices in exchange for an immediate advance of their value. It is an effective means that isn’t time consuming or so much of a fuss to apply for. At the same time, it works for entities with increasing bad debts, poor cash flows, high levels of liabilities and financial problems.
Now, if you are planning to subject your customer invoices to the said service then below are a few things to ask your chosen factors before turning over your right against the collection. Read up and get to answering.
Question #1: How much can I expect to advance?
Each factor often varies in this department but you can expect around eighty to ninety five percent of the value of the invoices. It is of course best to ask and talk to many providers so you can weigh your options well.
Question # 2: Do you do single invoice factoring, monthly or both?
There are those who cater to factoring single invoices only while there too are those who only do a monthly or long term arrangement. At the same time you can find those that cater to both. You have to know your needs and at the same task ask the companies you talk to.
Question # 3: What are the fees involved?
This one will also vary from one factoring company to another. The service fee is an amount paid to the provider for the services rendered to them and is deducted from the amount that can be advanced. Be sure to ask what fees these are and what comprises it. You don’t want to be surprised so you better know for sure.
Question # 4: How fast can I get the funds I need?
The very charm of dealing with factoring companies is the fact that invoice financing can get your needed funds quicker than other funding options there are. Of course this does not go to say that every provider does this well. You have to scrutinize and ask them point blank about this. Get to know their process and at the same time you might want to read reviews and feedback on them too.
Have you ever heard of single invoice finance? If yes then you are already treading the right path but if no then you better make sure to read on. This funding method has proven to be quite the solution for many businesses today, both starting and established entities.
Single invoice finance is basically deriving funds from your customers’ invoices. Such invoices are essentially receivables of the company from its clients. Remember that sales are not always paid in cash some are through credit.
In the normal pace of things, a company would have to wait for weeks to months before the whole amount due has been collected in full. But what if you would need to pool some cash for use? You cannot simply withdraw your money from your bank accounts. Plus, much of your available resources may have already been allotted and restricted to different corporate activities and expenditures. The solution is to hasten up the collection of your receivables by advancing them. Does it sound complicated to you? Don’t worry it’s no rocket science. Here’s a deeper explanation.
There are two types of single invoice finance. The first is called factoring and the second referred to as discounting.
In factoring, the company sells its customer invoices to a financing institution often referred to as the factor. It will then receive an advance equivalent to around 85% to 95% of the said invoices. The burden of collection will now be reverted to the factor who goes on to proceed with the collecting and when your owing customers have fully paid, the remaining balance of 15% to 5% will then be given to the company less any agreed upon discounts or fees.
This is essentially the sale of the corporate assets which are the receivables or customer invoices where cash has been locked up.
Discounting on the other hand produces the same benefits but has slight differences. An advance is still made from the financial institution but instead of selling them off, they are instead used akin to collateral but with no interests attached. After the advance of the value of the invoices has been received, the company is still tasked to perform the collection from its customers. When the company has completed this, it will then use such collections to repay the amount advanced from the financing firm plus any fees agreed upon.
Single invoice finance, both factoring and discounting works as a finance option because not only does it hasten receivables, free up cash locked up in invoices and improves cash flows, but it also is not a debt and therefore does not add up to your liabilities.
It is a given fact that banks are strict and are even tightening their terms when it comes to loan approvals. This is bad news for most businesses because we all know that cash isn’t always readily available. Fortunately, receivables financing has become an option for businessmen ad businesswomen. In here, factoring invoices is possible meaning that you can derive funds and money from them even before your customers actually pay. To help us understand better and to know the benefits you get when factoring invoices, the experts at the Working Capital Partners have discussed the following:
First let us define invoice factoring a little more. When you use such finance method you will have to look for a financing institution referred to as a factor. They will provide you with majority of the percentage of your invoices’ value, usually 80-95%, proceed to collect from your customers and when that is completed send you the remaining balance less any fees. Rather than borrowing you are actually selling your assets, in this case your receivables.
So why are they becoming more and more popular and why are they being used by many? This is because of its following proven benefits:
- QUICK AND FAST – You can pretty much get hold of the fund in less than twenty four hours. If that isn’t quick enough for you then what is?
- NO LIABILITIES – It will not be reflected in your financial statements as a debt but rather a reduction in accounts receivable and an increase in cash.
- LESSER BAD DEBTS – It can also lessen the likelihood of bad debts and the expenses or losses attributed to such.
- NOT RESTRICTED – You can use the fund you get the way you want to. You will not be restricted unlike a bank loan.
- LESS HASSLE – It is not your credit history and capacity that factors is concerned about but rather your customers. This means that there is less hassle because you do not have to prepare your financial reports or prove your credit rating.
- NO MINIMUM NO MAXIMUM – You can choose to factor only one, two, more or all of your invoices. You can also do it whenever you have the need to.
- BYE CONTRACTS – You will not be locked and put in hostage under a contract that can run for a long period of time and cost you a lot.
- NEWCOMERS ARE WELCOME – Even if your business is small or newly opened you can make use of factoring.
- IMPROVED CASH FLOWS – It can provide a quick injection of cash into your cash flow thereby making it more attractive to investors.
- STRESS FREE – No debt, improved cash flow, lesser bad debts, not restricted, affordable and flexible, factoring invoices are just less of a hassle meaning no stress!