If you’re a small or medium business owner, you have likely dealt with cash flow issues at some point in your career. However, understand that you’re not the only one through things like this and that numerous approaches can be taken to solve this issue. Whether your client is in the private, public, or government sector using, invoice factoring is one of them.
What is Invoice Factoring?
Invoice factoring or government contract factoring enables you to increase the cash flow within your company. This approach varies from a loan in that it increases your cash flow by utilizing the money that your clients or the government already owes you.
How Does it Work?
Invoice factoring to increase your cash flow is a straightforward operation.
First, the factoring company offers a lump sum in return for your unpaid invoices. This often accounts for 70–90% of the invoice’s value. Once that happens, you won’t have to wait for your customer or client to pay you before accessing this money.
The invoice factoring provider will return this money to you less any costs they charge for their service once the payment terms expire (often after 30 days) and your customer has made all of their payments. Further, the invoice factoring business will pursue the payment on your behalf if your customer has yet to make their required payments on time.
The Difference Between a Recourse Facility and a Non-Recourse Facility
Even after being reminded, if your customer refuses to pay an invoice, the money will still need to come from somewhere. With a non-recourse facility, the factoring business bears the expense so that you will keep all the money.
However, if you used a recourse facility, you would be responsible for paying any overdue debts, which will likely worsen your cash flow issues. In addition, due to the higher risk of the lender having to cover costs, non-recourse facilities are sometimes more expensive than recourse facilities. Therefore, consider your customers’ payment history and whether you believe they will make reliable payments when deciding which type of facility to use.
Discounts and Extra Charges
How much factoring companies or government factoring companies charge is a commonly asked question about invoice factoring. However, this varies significantly from business to business and depends on a number of variables, including the facility type.
Discounts are based on a portion of the total cost of an invoice. Discount charges are comparable to interest rates. When releasing bills with a significant value, this fee is often lower and is applied either weekly or monthly.
Small businesses should be aware of service fees because they are frequently significantly more for them than for larger organizations. This can be a recurring service fee depending on the annual revenue of your business or the factoring company’s business model.
Different Types of Invoice Factoring
There are several distinct forms of factoring from which to pick, depending on the circumstances and expectations of an organization. Among the various forms of factoring are:
Recourse Factoring:
With recourse factoring, the company, not the factor, determines the level of risk associated with each customer. In addition, due to the factoring company’s reduced workload, this sort of factoring typically has cheaper commission fees.
However, if you used a recourse facility, you would be responsible for paying any overdue debts, which will likely worsen your cash flow issues. Due to the higher risk of the lender having to cover costs, non-recourse facilities are sometimes more expensive than recourse facilities. Therefore, consider your customers’ payment history and whether you believe they will make reliable payments when deciding which type of facility to use.
Non-recourse Factoring:
Under this arrangement, the original business will receive the invoice if the factoring company needs help collecting it. The factoring company would then issue a refund for that invoice.
Even after being reminded, if your customer refuses to pay an invoice, the money will still need to come from somewhere. With a non-recourse facility, the factoring business bears the expense so that you won’t lose any money.
Advance Factoring:
Advance factoring ensures that companies will be paid as soon as the factoring company accepts responsibility for the invoices. The amount paid to the company is equal to the invoice’s total amount, less the commission and margin of the factor.
Selective Factoring:
In this process, a company transfers part of its invoices to a factoring company but not all of them. This kind of factoring might be used to handle invoices for a particular service that your employer offers.
Confidential Factoring:
In confidential factoring, customers are not informed that the company collecting their money is an outside factoring company. When you wish to maintain control over client contacts, this kind of factoring can be helpful.
