How much do factoring invoices cost?

There are several financing and funding processes involved in businesses to keep them afloat. The finance team has to be constantly on their toes to make sure the working capital is flowing right, and the business is supported well. Among many such finance solutions comes the invoice factoring. 

What is voice factoring?

Invoice factoring is one such way for the businesses to raise money by selling their outstanding invoices to a factoring company at a discount. It is a type of invoice financing where a third-party lender (a factoring company) lends cash against the customer invoices which are yet to be paid. This arrangement helps the business to receive most of the invoice cash immediately rather than waiting for weeks or months to get paid.

The amount of funds available or lent is typically determined as a percentage of the outstanding sales ledger or debtor book. However, this may be restricted by a specific condition, such as limiting exposure to a single large customer. 

Invoice factoring is also termed as accounts receivable factoring or debt factoring.

How does invoice factoring work?

As you stated above, invoice factoring means selling the control of your accounts receivable, that is, selling your invoices either full or in parts. The process that follows can be understood in the steps below: 

1.       You provide goods or services to your customers and invoice your customers for those goods or services.

2.       You "sell" the raised invoices to the factoring company.

3.       The invoice factoring company verifies the invoices.

4.       After the verification, they pay the bulk of the invoiced amount immediately. Typically invoice factoring companies lend up to 80-90% of the invoice value. 

5.       Moving ahead later, your customers pay directly to the factoring company. 

6.       Finally, once they've been paid in full, the invoice factoring company pays you the remaining amount after deducting their fee.

Factoring Fees and What to Expect

Just like any other business lending or financing service, invoice financing also has fees associated with it. Invoice factoring fees are the discount that the factoring companies receive for purchasing invoices before due dates and waiting for your customers to pay them.

Below is a simplified factoring fee example:

·         Invoice face value: Rs. 1,000

·         Amount advanced: Rs. 800

·         Factoring rate: 1%

·         If calculated on amount advanced: Rs.800 x 1% = Rs.8

·         If calculated on invoice value: Rs1000 x 1% = Rs 10

The rates for invoice financing are determined based on a number of factors:

·         The volume of the monthly receivables you wish to factor in for your business.

·         The average size of each invoice was raised for factoring.

·         The industry to which your businesses is catering to

·         The creditworthiness of your customers who are the ultimate payers.

·         The time period it takes your customers to pay back the whole amount.

·         The model that the factoring company uses to structure its discount rates.

·         Your company's risk level in terms of the profit and other related criteria. 

Average factoring costs fall between 1% and 5%, depending on the aforementioned factors. The Volume of the monthly receivables plays a massive role in determining the factoring rates. The larger is the monthly amounts factored, the lower the fees. 

The invoice Factoring companies generally use any of two fee models to charge the business:

·         The one all-inclusive fee model.

·         The second model with invoice factoring fees and factoring account fees.

The typical invoice Factoring Fees & Rate Models follow either the Flat Discount Model or the Flat Discount plus Margin Model.  

In the Flat Discount Model, fees are determined by applying a rate on the gross value of the invoice instead of the amount advanced. This model is common among the new wave of online lenders.

Taking into account the Flat Discount plus Margin Model, the factoring companies use a combination of an annual interest rate in addition to the flat fee ad defining their discount rates.

When should your company use factoring?

If you plan to opt for invoice financing for your business, you should only go ahead when you have many outstanding invoices and your company's cash flow suffers from it.

You might opt for invoice financing to bridge short-term expenses or repay a loan. You can also support your business with invoice factoring and take advantage of the seasonal business opportunities that come your way. Invoice factoring also helps with the cash flow if it has been reasoned to restrict the cash flow, otherwise impacting the trade relationship. 

Advantages of factoring

Invoice factoring is based on the money owed to your business in the form of invoices. 

·         Improve the cash flow and more predictable 

·         Better cash flow gives your business a better chance of survival ad growth. 

·         The immediate cash helps your business expand sales and marketing, add products and inventory, and focus on the additional production and service staffing.

·         Unlike traditional financing options, factoring doesn't typically require pledging any business or personal assets as security, and the invoice itself works as the collateral.

Invoice factoring is used by a growing number of B2B companies as it helps them to stabilize and accelerate their cash flow. One such invoice financing company is Skyscend providing a predictable working capital solution, enabling expansion of your business, and helping you to improve the payables cycle.

Skyscend also offers invoice financing for small businesses wherein the business can find a foothold in case of delayed payments ad do not miss out on the opportunities prevailing the high ed competition in the market. Invoice financing for small businesses is particularly beneficial for the seasonal profits, which would suffer from a lack of cash or timely payments. Skyscend releases about 80% of the cash in approximately seven working days after verifying the invoice raised compared to the more extended wait period of about 30 or 60 or 90 days, which can substantially affect the business growth.