In our last blog post we discussed how to get paid faster by improving your payment terms and offering your customers a discount on their invoices. In this blog post we discuss how invoice factoring can help you get paid faster.
In invoice factoring you essentially sell your invoice to an invoice factoring company for a discount. That company in turn provides you with 70-95% of the invoice amount in advance within 24-48 hours.
In most cases the company then takes over the invoice and the collections on the invoice. Once your client pays off the invoice, the factoring company will provide you with the rest of the invoice amount minus their cost which is usually 1.5% to 3.5% per invoice amount per 30 days.
So an example would be, you invoiced your client $10,000 dollars with NET 30 payment terms, however your client usually pays within 45-90 days but you need that money within 30 days. You find a invoice factoring company that charges 1.5% per invoice amount per 30 days with a 80% advance.
That company will pay you $8000 within 24-48 hours.
$10000*.80 = $8000
They will charge you $150 every 30 days your client has not paid the invoice in full.
$10000*.015 = $150
So if your client pays within 30 days you will be charged $150 in fees, 60 days than $300. Say your client does pay off the amount within 30 days of the company taking over the invoice; the company will now pay you $1850.
$10000*.20 - $150 = $2000 - $150 = $1850
By then the company has paid you a total of $9850 and kept $150 in fees. The important part is you got $8000 or 80% of your invoice amount within 24-48 of transferring the invoice to the company.
Some additional benefits with factoring are it can be cheaper and easier than getting a bank loan. The factoring companies also provide collection services and credit management. Your business also gets cash without incurring debt and the amount of cash offered is not limited unlike a bank loan.
The invoice factoring company looks at the credit worthiness of your clients as compared to your business. If your clients are other companies or government entities it should not be hard to get good factoring terms. However, you might not get good terms if your clients are individuals with bad credit.
If your business mostly serves individuals we would recommend that you try better payment terms and discounts first. Companies like FundBox are another option for freelancers/self-employed but they make you take on debt by giving your business a short term loan. Another way is have the clients prepay into an escrow.
In the next blog post we will look at how using invoicing software can reinforce some of the concepts we have discussed in this blog post series on getting paid faster.