Your receivables, your capital!
Do you often have to scramble for short-term working capital needs? Is your receivable turnover higher than what you want it to be? If your answer to both these questions is ‘Yes’, then invoice financing is precisely what you are looking for.
The global invoice factoring market reached a high of $1946.5 billion in 2021 and is further expected to reach $4618.9 billion by 2031, with a CAGR of 9.4% between 2022 and 2031. Recovering from the effect of a pandemic, such astounding figures bring the focus back to short-term financing needs for businesses.
If these figures astound you, hold on. We’ve prepared this comprehensive guide here to discuss the intricacies of invoice factoring, how it works, why it matters for your business, its pros and cons and how BridgeUp can make this easier for you. Let’s dive right in!
Invoice Financing is an alternate financing option allowing a firm to sell its outstanding invoices to a third party. This third party offers mostly instant and upfront cash.
Why is it better than traditional financing, though? Because it won’t affect your credit like traditional financing. It doesn’t involve borrowing money but simply, selling outstanding invoices to earn the immediate cash you might need if there’s a cash crunch.
Where can you get the money to pay your suppliers or employees? How do you still purchase machinery, if need be? The solution is: to go for invoice factoring. The best part about it is – you don’t need to wait for the Accounts Receivables (A/R). In fact, invoice factoring is a good way of earning money through your A/R.
Whether it is right for you to opt for invoice factoring depends on your need to increase cash flow. Added turnover earned through invoice financing can help you do that, as it collateralizes A/R.
Remember that profitability doesn’t always entail positive cash flow. Companies having clients with extended payment terms can also find it difficult to meet certain financial obligations. This can easily make the whole scenario so perilous that it would make you doubt whether you’re profitable at all.
Specifically, growing firms and start-ups use invoice factoring for its immediacy and to avoid lengthy traditional processes of receiving bank loans. Although invoice financing can be more costly for your firm than traditional options, it offers an assurance of quick cash when you need it upfront.
Invoice factoring has various types. Let’s look at some popular categories of invoice factoring:
This factoring option doesn’t factor in bad debt-related risks. The third-party can still get their money if your customers don’t pay. The factoring agreement contains details on how many days after you need to refund the advance.
In this kind of factoring, bad debt-related risks are factored in. Specified risks entailing the failure of the debtor to pay are covered by non-recourse financing. Unfair debts tied with genuine disputes are not insured by this factoring option. So compared to recourse financing, securing non-recourse financing can be expensive for businesses.
As the name suggests, this is about paying the amount in advance. When the invoice is factored in, the margin and invoice minus the commission are paid to the firm. The margin is generally paid after the debtor has realized payments from its customers. The margin can range between 5% and 25%.
Certain factoring services offer only collection benefits. Under this factoring type, firms receive the invoice amount only after the payments from their customers have been realized.
Under this special arrangement, the bank generally pays a factor’s margin. This factoring option can be great for businesses where maintaining a small margin is crucial.
It is one of the most popular types of factoring. With this, the client is provided with all types of facilities by the debtor, including protection from bad debt, collection, etc.
This factoring type is indeed an innovative way of getting out of bad situations. This type needs a factor-taking guarantee for the business. The payment owed to the supplier of the business is guaranteed by the factor, and payments to the suppliers are made after realizing the money from the customers.
When dealing with invoice financing, it’s not uncommon to get confused between invoice discounting and invoice factoring.
Both are basically asset-based financing options. However, the main difference lies in whether your lender owns the sales ledger or not. It also depends on who is finally collecting the payments from your customers.
In factoring, the financier is responsible for the sales ledger and collecting payments from the debtor’s customers. In the case of debt discounting, these responsibilities are handled by the debtor. The end customer generally doesn’t know there is a financial arrangement between the business and a third-party financer.
Invoice factoring service providers specialize in processing invoices on behalf of a borrower. Invoice factoring involves selling some or all of your invoices to a factoring service provider in order to enhance their cash flow.
A factoring company would pay the borrowers most of the invoiced amount on the spot. Moreover, they take the responsibility of collecting the due payment on the invoices directly from the customers. Following is a short process of how it works:
Honestly, one cannot associate a fixed cost to invoice financing as the need arises on a business-to-business basis, which adds to its dynamic nature. Hence, the first step is to understand how invoice factoring costs are calculated.
There are two basic components to invoice factoring: the discount fee and the service fee. Within both these costs, lie the average base rate costs, which range from invoice to invoice. However, these aren’t very suggestable due to multiple factors associated with them. The first factor to take into account is the discount fee. This is calculated as the percentage of the invoice and ranges between 1.5 and 5%. This is often calculated on the funds advanced and on an annual rate. However, the fee is then charged on a weekly or monthly basis, given how the advance is tailored.
For example, the discount fee is 5% of the total invoice value. The invoice is raised for $100,000 with a 30-day term for every year. Hence, you’d be paying $410.95 for each term payment calculated as ((5000/365)x30).
The second critical factor to take note of is the service fee. This is defined as an administrative fee that the factoring provider charges for the range of services it manages for a client. This mostly ranges between 0.5 to .25% of the invoice value factored.
However, this again relies on a range of factors that have been explained below:
Additionally, there are some other minor factors as well, which some service providers need to keep in mind:
Besides the cost and rigidity of invoice factoring, there are some other factors that are disadvantageous to a borrower. The following list summarises the critical ones:
Despite the minor drawbacks, it is evident that invoice factoring provides an alternative route to bank loans for short-term capital requirements. This eases access to finance by liquidating your receivables earlier than the expected date while delegating the responsibility to collect the dues as well. Moreover, the factoring fee varies on factors that the borrower can control, making the process more feasible.
Where factoring fees can be dependent on a lot of factors, a factoring service provider needs to be well-versed in the complexities of handling bulk invoices and managing them. This is where we bridge the gap.
We provide a tech-oriented solution to invoice management and factoring. With BridgeUp, you wouldn’t have to worry about a reasonable discounting fee, payment collection, or collateralization. To put it simply, BridgeUp provides a one-stop solution to all your invoice factoring needs with a robust infrastructure and tech-enabled platform to manage your invoices in an efficient way.
At BridgeUp, we ensure that your invoice factoring needs are tailored to your cash flow requirements with minimal hassle. We can guide you through the entire process of deciding a discounting rate to collecting payments from the customers. Sign up with BridgeUp now or call us at +91-9819660287 to manage your invoices better.
There is no straightforward answer to this but a suggested rule of thumb. If a borrower or a company has a bulk of invoices and their cash flow is suffering due to this, they should consider invoice factoring services.
BridgeUp provides a tech-enabled platform for managing and factoring invoices. Driven by experienced personnel, BridgeUp can offer you a seamless experience in managing your invoices.
It ranges between 1.5% and 5% of the invoice value.
It generally takes 2 to 7 business days to review and process the application.
It usually takes up to 3 days to get funded.
The basic eligibility criteria are as follows:
Growth Capital Things You Should Know