Invoice Factoring

What is Invoice Factoring?

Invoice Factoring, or Accounts Receivable Financing, is a type of financing that provides immediate working capital to companies by financing their outstanding invoices. Factoring is the sale of an asset (cash for receivables). A factoring company is a third party that buys invoices at a discount from a company with an outstanding receivable balance. Factoring is not a bank loan; it is not money that you have to pay back. Rather, factoring allows you to be paid upfront for money that you are owed.

Factoring Vs. A Bank Loan?

Factoring is completely different from bank financing. With bank financing, a bank will lend you money based off of various underwriting standards such as your credit history and balance sheet. Additionally, with bank financing, you have incurred debt whereas with factoring you receive funds from sale of an asset (i.e cash for your receivables). Grenenback is less concerned with your credit and balance sheet because we are financing your business through revenue streams and not a “promise” to pay back a loan. In other words, Greenback is not reimbursed by you, but rather by your client upon payment of the receivable.

Advantages of Factoring?

When you factor invoices, you have immediate access to working capital. No more waiting for those crushing 30, 60, 90 payment terms. You can reinvest these funds to grow your business and meet expenses. With factoring, you can:

• Control Your Cash Flow
• Maintain Low Debt Levels
• Spend Less Time Managing Invoices/Collections
• Your Credit and Collateral is Untouched
• Stop Waiting on Slow Paying Clients
• Extend Your Cliens Payment Terms Without Burdening Your Business

Does Factoring Make Sense for Your Business?

Below are some key indicators that are typical of companies who would benefit from invoice factoring:

1. Your Customers Demand Credit Terms/Payment Flexibility

Most clients look for flexible payment terms. By factoring your receivables, you can extend these terms without burdening your company and stunting your growth. Many companies often build the cost of factoring into the cost of their goods or services.

2. Your Business is Acquiring New Debt to Cover Expenses

If you find yourself taking on new debt to pay expenses, you may want to consider factoring some of your receivables. It is always good to have a factoring line in place so that you have the tools to manage your cash flow and make sure you have the cash to meet expenses.

3. Slow Paying Customers Are Stunting Your Growth

There is an opportunity cost to having your funds tied up in receivables. Maybe you want to bid on a new contract, but do not have the working capital to meet the demands? Maybe you want to take advantage of discounted rates with suppliers? Whatever the case, it is always adventageous to have the instant ability to turn your receivables into cash.

Common Misconceptions Regarding Factoring?

1. “Only unhealthy companies factor their receivables”

Many well managed companies exploit factoring to free up funds that are not being utilized in their A/R. Factoring enables companies to take advantage of growth opportunities around them by freeing up these funds.

2. “Factoring is too expensive”

Some are opposed to factoring due to the cost. In reality, once you realize factoring gives you access to unlimited working capital without affecting your credit, taking on new debt, or sacrificing equity, factoring begins to make sense. The price of factoring a 30 day receivable is less than the price a retail merchant pays to accept a credit card. With factoring, you are able to extend those valuable credit terms to your clients without suffocating your business.

3. “Factoring makes my company appear weak”

Many companies are hesitant to utilize factoring because they are worried it will make them appear weak to their clients. However, more often than not, your clients will find assurance in that you are going to fulfill your obligations because you have the financial backing and working capital to do so.

What Are Greenback's Rates?

Our rates range anywhere from 0.89% to 1.99% per month. The rate depends on many variables including: the volume of invoices you factor, the amount of time the invoice is outstanding, you industry and company, and the credit worthiness of the account debtor (i.e. your client).

Questions to Ask When Considering Factoring?

1. The Cost of Factoring?

The cost of factoring is one of the most important considerations. Before you enter into an Agreement, be sure to have an understanding of the fees and how that will impact your bottom line.

2. Is There an Account Minimum?

Many factoring companies will establish a monthly minimum. They have to allocate a certain amount of capital to your company, so in return it is expected you factor a minimum amount of receivables.

3. Are There Other Added Benefits?

Greenback Capital can provide added benefits with such things such as online reporting and time saving back office work.

4. What is the Length of the Factoring Agreement?

A 6 to 12 month agreement is standard for the industry. This is something we can discuss and find an Agreement that works for you.

The Pros of Factoring?

1. It provides you with immediate cash.

The most important benefit is that factoring provides your business with immediate cash and working capital. Factoring is a great tool to fix cash flow issues and grow your business.

2. It Lets you Provide Payment Terms to Your Client.

Most large commercial and government clients insist on paying invoice on a 30-60 day timeframe. If you are not able to offer these payment terms, then your chances of winning an account are slim. Factoring enables you to extend these payment terms ensuring that you have ample cash on hand to do so.

3. It Helps You Manage the Creditworthiness of Your Clients.

A major challenge to offering payment terms is being able to determine the creditworthiness of your customers. Greenback Capital is an expert at evaluating the creditworthiness of your Clients. We also have access to commercial credit reports, which in turn enables you to effectively 'outsource' this task to experts. This service is included in the factoring fees.

4. It's Relatively Easy to Qualify.

Compared to other funding solutions, factoring is relatively easy to obtain. As long as: (i) you have invoices for delivered work that are payable by creditworthy customers, and (2) your business is free of any liens/legal problems, then we can provide you funding.

5. There is not set facoring line - as your sales increase, so does your access to factoring.

Most convential financing solutions, such as a bank line, have a set line. Factoring on the other hand is tied to your receivables, so if you are a company experiencing rapid growth, factoring pace with your expansion.

6. It Can Be a Short Term Funding Solution.

Factoring does not have to be a long term solution. We are happy to provide a 6-month agreement that can fill a temporary cash flow need.

7. Factoring Does Not Require That You Give Up Equity.

Perhaps one of the most important advatages to factoring is that you are not required to dilute the ownership in your company. When you sacrifice equity, you not only give up a portion of your business (and future earnings) but can also lose some of the control in your business.

8. It's Tax Deductible Financing.

Factoring fees are expensed pre tax, meaning that you reduce your overall tax burden. This makes factoring more affordable (e.g. if your fee is 1% per 30 days and your tax rate is 28%, then the effective factoring rate is 0.72%).

9. It's Small Business Friendly.

Factoring can be used by all types of businesses - small or large. However, obtaining traditional bank financing for a company that has 250,000 - 1,000,000 of annual revenue can be challenging as banks rely on volume to make their profits.

The Cons of Factoring?

1. It's More Expensive Than a Traditional Line of Credit.

As a rule of thumb, factoring is more expensive than a traditional bank line. Our rates can range from 0.99-1.99% per invoice.

2. Factoring Tends to Be One Dimensional.

Factoring solves one main problem: cash flow shortages attributed to slow paying clients. In this sense, factoring can be one dimensional. Fortunately,Greenback can offer additional financing solutions when it makes sense (e.g. equipment financing, work in progress financing, etc).

3. Factoring Can Be Somewhat Labor Intensive.

With Factoring, you must submit supporting documentation in order to receive an advance (schedule of accounts, invoices, etc). We have made this as easy as possible giving you options (online portal or email) and have a dedicated back office to cater to all your needs.

4. We Don't Advance Against Bad Debt.

While we are effective at helping you mitigate any bad debt, we do no advance against bad invoices, nor are we are not a bad debt collection agency.