Giving clients long payment terms can be a competitive edge. But small businesses often don’t have the financial muscle to bear this burden. Enter online invoice factoring.
A financial service that fintech companies are beginning to take online is invoice factoring. This is another means of quickly opening up your cash flow online which small business owners should keep in their toolbox.
What is online invoice factoring? It is the means of using online lenders to quickly turn your billings into cash. You don’t have to wait for 30, 60, or even 90 days to collect from your customers. The online factoring firm will give you up to 90% of the amount in your account receivables and take care of collecting from your customers in exchange for a fee.
Don’t confuse invoice factoring with invoice financing. With the latter, you get 100 percent of your invoice amount. You are still responsible for collecting payment from your client.
Until you do so, you pay a fee to the financing company that accrues on a weekly basis. You have fulfilled your contract when you pay back the full amount to the financing company.
With invoice factoring, you get a portion of the invoice amount. This can range from 70% to 90% of the invoice. The factor will take care of collecting from your client. You can then focus on making your next sale.
Advances in software technology have enabled the whole transaction to be held online. You can get your cash the next day or even faster.
You can get your much-needed cash in your bank account or e-wallet. The whole process is streamlined, efficient, and digital.
Small suppliers are often at the mercy of big companies who demand longer payment terms in exchange for doing business with them. Payment terms of 30, 60, and 90 days are common.
Experience also tells us that sometimes large enterprises will clog the collection process with red tape.
Business owners are left with no choice because big companies order big and long-term if they like you. This can stabilize your small business for the foreseeable future.
You can also leverage your client roster for more businesses if prospects see major brands on your list. It tells them that you are a dependable and quality supplier that can be hard to come by.
But the competition is also fierce so once an opportunity opens, you have to take advantage fast. The problem with most small businesses is how to fill the gap in their cash flow knowing the long waiting time and tedious collection process.
You are basically forced to give your customers interest-free loans. No more of that.
A. Advantages of online invoice factoring
1. Quickly turn sales into cash
This is where online invoice factoring can give you a shot in the arm. You can quickly turn sales into cash which you can put to work right away.
You can use that money to purchase equipment to boost production, pay your people, settle bills with suppliers, or even take on bigger and more rewarding projects. Factoring keeps your cash flowing.
2. No collateral
Another benefit of online invoicing is that you don’t have to get a loan with collateral. Your accounts receivable is already your collateral.
This is not the case with traditional loans where you have to put up your house, property, or car as collateral before your loan application can even be processed.
3. No credit rating needed
Online factoring companies assess not your credit standing but your customers. They research your clients’ payment history and creditworthiness.
You may be able to ask your factors to share with you what they found out about your client’s credit history. This will help you determine which customer can be given payment extensions, which one should pay on delivery, and who should pay upfront.
4. Everything is online
The power of fintech is that you can be anywhere and still be able to do transactions online. Instead of wearing your business suit to meet with the “factor”, you can just open your laptop or mobile phone and apply for approval while in your pajamas.
B. Disadvantages of invoice factoring
As you know by now, this is the part where we caution you about the potential pitfalls of online invoice factoring. There could be major showstoppers along the way if you go about it haphazardly.
1. Short term
First, invoice factoring is only a short-term solution. Online factoring firms can offer significantly cheaper fees starting from 0.5%. Not too bad? It can quickly add up. Some factoring arrangements can have an annual percentage rate of 20% to 50% and a good spread in between.
2. Exposure to client risks
Factoring doesn’t eliminate the risk of your customer not paying. This could be due to disputes in your contracts, defective goods, bad service or the company just went belly up. This means you have to give back to your factoring agency the amount they gave you plus fees.
3. Risk to your customer relationships
Factors may reach out to your customer as part of the agreement. Some customers do not like this especially if your factors turn out to be too aggressive. It may also give the impression that your business is not doing too well and clients may shy away from giving you further business.
So how do you go about doing this online invoice factoring thing? Just like Santa, make a list of online factoring companies. Find out who’s naughty or nice. Research and read the reviews. What are people saying about these companies? Make sure you find the right fit. Social media can be your best friend here.
Compare rates, approval process, and if their service is available in your city. Try to avoid long-term contracts. If they accept on a per invoice basis, then the better for you who is just testing them out.
One thing you should avoid is evergreen clauses or auto-renew contracts. Have these clauses stricken out because it can be quite messy to get out of one once you sign the dotted line.
Prepare to submit documents online. Some lenders will reach out to you to go over some items in your documents and verify some information. Don’t be triggered. This is only for the initial phase.
After you get approved and become an account, the rest of the process will be easier. You just submit the invoices to the factoring firm either through an app or a website.
Receive up to 70% to 90% of the invoice value. You will receive the remainder of the invoice value soon after your client pays what they owe you minus the fees.
Now that you understand online invoice factoring and would like to try it out, QuickSprout has a list of top online invoice factoring companies here.
Conclusion
Online invoice factoring is a great and quick way to keep your cash flow open, especially in emergencies like making the payroll. You only want to rely on this as a stop-gap or as a short-term solution. The best way is to stay on top of your invoices and effectively manage your cash flow.