One of the best kept secrets within major corporation financial tools is invoice factoring. The same access should be given to more small businesses in realizing the financial power behind their accounts receivables. This funding source is of great use, particularly for those small business suppliers challenged with the need to extend payment terms.
The inability to qualify for a bank loan remains an issue for some of these suppliers. Fortunately, invoice factoring companies have the financial resources to increase funding to the businesses. Factoring is an alternative source of funding to meet the urgent working capital needs of suppliers.
Slower activity from traditional banks is only part of the reason the popularity and prevalence of the invoice factoring sector is increasing. Many businesses across a broad spectrum of industries are finding out that services provide a unique way to capitalize on practices that would otherwise stifle growth. By eliminating the 60 days or longer waiting period for customers to pay invoices, factoring has grown to an estimated $13 billion a year industry.
Continued market growth for this innovative lending source is also due to increased safeguards and decreased costs. With a more respected reputation in the financial services industry, companies that allow borrowing against receivables are increasing its funding well to businesses.
Typically, suppliers offer competitive payment terms for customers that buy goods and materials. From raw materials to office equipment and supplies, suppliers usually extend credit to approved customers, which does not require immediate payment of invoices. Although prompt payment is desired, some suppliers are hesitant to demand that customers pay within a short period of time.
The overall credit rating of customers can determine the terms and conditions of paying for supplies. In many cases, the payment terms are flexible enough to allow up to 30 days to pay after items are delivered. Some customers pay their invoices on time; others choose to wait 60 days or more before paying an invoice. In the mean time, suppliers must wait even when payroll and other operating expenses are due.
The incentive to offer generous payment terms is often based on competition. If one supplier moves towards stringent payment terms, they could lose business to competitors. Invoice factoring can be valuable to suppliers with high numbers of unpaid invoices. Access to immediate cash can enable suppliers to fund current business operations and even look into expanding. Additionally, income projections are much easier to make without waiting several months for a customer to pay.
Currently, there is a small but steady increase in consumer spending, hiring and an economy that is getting stronger. At the same time, lending policies are virtually unyielding to most small businesses. Instead, invoice factoring companies are getting the bulk of business from suppliers that cannot get bank approval. Even those that might easily qualify will typically have to wait longer to receive funds.
With factoring, suppliers can have cash in hand within 48 hours. The money can be used to fund expansion, buy equipment or to simply pad cash flow to fund daily operational costs. Some banks offer a repayment schedule of five to 10 years; some suppliers may only need to borrow for up to 15 months. Furthermore, lending criteria is different from traditional financial institutions.
There are various industry associations that work to ensure best practices are followed by factoring providers. Generally, these associations provide guidelines for best practices, education and training to make sure the industry has plenty of trustworthy and legitimate companies. This also helps to make sure pricing and interest rates are fair and appropriate for the types of financial service being offered.
Many suppliers needed space to weather the Great Recession when supply orders were inconsistent. Being able to receive an advance on invoices provided critical funding that was not available from traditional sources. The success of financing with factoring services has led to repeat customers, which is helping to fuel the growth in funding.
Furthermore, suppliers are realizing that using factoring services can help to increase operational efficiency, which is a driving force behind success. Many factoring services will take over collection of invoice payment activities for customers. This creates a win-win scenario for companies. Suppliers are not waiting for payment or dedicating resources to collect on past due accounts.
Society overall expects instant results and supplier customers are no different. A successful supplier cannot tell a regular paying customer that their shipment is delayed because the supplier is waiting for payment from another customer. Nor can the same supplier explain to hard-working employees that their paycheck will be late because invoice payments are late.
In theory, perhaps a supplier could give these explanations to customers and employees. However, it is not likely that the supplier will remain in business much longer. As the need for better cash flow continues to grow, so does the increase in funding options. The factoring industry is prepared to provide the financial services that many companies cannot receive from traditional lending sources.
In the past, invoice factoring was only available to select industries and was seen as a last option for businesses that needed cash. Today, this service has become not only widely used in many different industries, but is also a respected financial source in the business world. From the small local vendor to multinational corporations, invoice factoring is used regular around the globe.
While the factoring industry is experiencing record growth, this could expose the industry to others who may try to exploit these valuable services. There are a few precautions that industry experts suggest before any business decides to partner with a company that offers factoring services.
Does the Factoring Company Understand the Supplier Industry?
Different businesses have vastly different processes that requires a unique understanding. Otherwise, a working partnership can suffer between the factoring company and supplier. Even within various industries such as oil and gas, construction or transportation, vertical niches make a difference in the types of materials a supplier provides.
In addition, suppliers are not limited to a factoring service that is headquartered in their base location. Experience and industry specialization is much more important when selecting a funding partner. Unless the service is a good fit, suppliers will not solve their financial problems. Valued customer relationship might suffer if the process of getting funds is not cohesive and seamless.
Look at the Factoring Company’s Management Team
Many companies had bad experiences because they were not aware of the funding partner’s management structure. Unreliable services and questionable sources of capital caused the factoring industry to earn a negative reputation. Companies should make sure they are connected to a legitimate factoring service.
Generally, this includes knowing how long the factoring service has been in business and getting references from other satisfied customers.
Understand Terms of Transaction
Suppliers should examine all details of the funding agreement – this includes the fine print. Any questions about the agreement should be answered. The portion of interest costs that will be paid and the amount paid out based on invoice values should be covered. Basically, suppliers should fully understand the contract before proceeding.
Tougher lending standards for the financial services sector are curbing abuses as the factoring industry continues to grow. However, it is still the supplier’s responsibility to understand contract terms to make sure their funding needs are met.
In summary, suppliers who are challenged with receiving regular customer payments can turn to a factoring company for an immediate cash infusion. Funding can be tailored to fit specific needs based on the supplier and industry they serve. Partnering with a reputable factoring company cuts out the middleman; all funding and decisions come directly from the factoring company.
While these alternative lending sources provide a means for business growth and cash flow, it is in the supplier’s best interest to examine different products and services. Doing so will improve chances for success in continuing to meet customer needs while having a direct connection to funding when needed.