Accounts receivable factoring (or invoice financing) has been around for centuries as a means for small and large businesses to obtain needed working capital while they wait for their customers to pay invoices.
If your ship goods or render services to your business customers but have to wait 30, 60, 90 days or more to get paid (as most invoices offers these trade terms) and your business could use additional capital today to complete other jobs, meet payroll or go out and win new business, then your company could benefit from accounts receivable factoring or financing.
However, in recent years, not all invoice financing has remained the same.
Most accounts receivable factoring companies (like most banks) realize that it costs them the same to underwrite a $1,000 factoring agreement as it does a $1,000,000 agreement. Thus, they tend to migrate to larger deals (getting more bang for their buck so to speak).
Thus, many invoice financing companies have begun to add restrictions that just were not there a few years ago.
Some of these restrictions include:
Minimum Factoring Amounts: In fact, many accounts receivable financing companies require a minimum $50,000; which is OK for larger companies who have those larger amounts to factor. But, smaller firms, just wanting to factor an invoice or two, again get left out.
Long-Term Commitments: As underwriting accounts receivable financing can get expensive on the lender’s part; we have begun to see long-term commitment requirements crop up in factoring agreements. These usually require that the borrowing company not only factor a minimum amount of their invoice (see the point above) but factor those amounts over an extended time period, say one year or more (which could mean factoring many cycles of invoices).
Upfront Fees: Factoring companies, like many banks these days, are learning that fee income is the best income because it costs very little to get and usually flows almost directly to profits.
Now, some companies will tell you that these fees are to offset their costs of underwriting so that they do not have to pass those costs along to you. But, do know that all costs (underwriting through servicing) are captured in the financing company’s factoring rate.
Over the last decade, we have seen upfront fees from invoice factoring increase from small amounts like $50 to over $500 – regardless if your business receives financing or not.
Choice Of Invoices: Most factoring companies want to reduce their risk of not getting paid. This is somewhat understandable as they are taking a risk on the fact that your customers (not you) will pay their bills.
Thus, these financing companies will ask to look at all your outstanding accounts receivables and then hand pick those invoices that they think will provide them the least amount of risk of repayment. This means that they may choose some invoices that you don’t want to factor while leaving you in the lurch for those invoices that your company really needs to factor.
What these restrictions tend to do is create added benefit for the factoring company while placing more burdens on the borrower (growing small businesses) or shut out smaller businesses from the financing market all together.
It really is simple – conform to their policies (meaning factoring more of your invoices for longer periods) or don’t get the capital your business needs to continue to grow.