Factoring your invoices can provide your business with the cash management tools needed to avoid late payments on your own obligations, even if your customers pay at unpredictable times. It is essential for companies that find themselves busy and profitable on paper, but continuously short on cash when supply and utility bills come due. If you have never used a service like this for working capital, there are a few things to understand as you apply and negotiate your first deal, because it is quite different from debt financing.
Financing Invoices vs. Selling Them
If you want a cash advance against your payment from customers, you can find that in an AR financing program. It’s a bit different from factoring, though, because when you make a deal with a factor, you discharge those invoices as paid for less than face value, then the service accepts the risks and benefits of attempting to collect payment. This is to streamline administrative work, so usually, the customer invoices are still current and not past due. In fact, the younger the invoices are, the closer you will get to a face-value offer. Many businesses use this by sending invoices out almost immediately after receipt, effectively outsourcing the company’s entire receivables bookkeeping.
Just like with loan applications, you need to prepare some evidence of your company’s income. In this case, it is to document both your customers’ outstanding invoice balance and their payment histories, rather than to establish your actual income and financial health. You will also need to include basic identifying information about your business. Typically, you’ll have a short form to fill out and then you will need to include your invoices and a copy of your financial statements with a copy of your receivables ledger. That is usually enough for tentative approval.
The last step is being ready for communication with the factoring service. Typically, a second request for information comes with the first offer if you’re approved, and most businesses with clients who pay regularly get approved. The faster you respond to queries or counter offers, the faster you can have a signed agreement and cash in hand. Once you find a service you work well with, it’s easy to get into a groove where approvals happen almost immediately because your factor will learn your business and be able to anticipate your customers’ payments. That makes it easier for you to get a good deal on your invoice values.