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How to Get Paid Faster with Invoice Factoring

Molly @ Wingspan
April 3, 2020

If you want to get paid faster, you may have come across a financial tool called invoice factoring, also known as third-party invoice factoring.  Businesses use invoice factoring to accelerate their cash flow. By using an invoice factoring company, you’re paying a fee to get your money faster, while avoiding the trouble of taking out a small business loan. Does invoice factoring make sense for your business?

Invoice Factoring Basics

Invoice factoring companies refer to the business that owes money as the “debtor.” (In this case, your client.) The business with accounts receivable is called the “client” (that’s you), and the third-party factoring company is often referred to as “the factor.” Factoring companies will, however, buy invoices at what they call a “discount,” which is their fee for accelerating cash flow.

Why would a company use invoice factoring?

Tony Neglia, president of Stonebridge Financial Services, says that businesses might opt to use an invoice factoring company because the debtor might have terms of 30, or 45, or even 60-plus days. “Small business owners often can’t wait that long to get paid,” he says. So the factoring company will give their client an advance of 80%, and then the debtor pays the factoring company. When the factoring company gets paid, they send the remaining 20% to their client, less their factoring fees. Getting that money as quickly as possible can be “very important to a small business,” Neglia adds. “If you have employees, you have to make payroll.” You wouldn’t typically see companies using a third-party factor for a one-off transaction. According to Neglia, “The factoring company and the client have a close relationship,” and the client is usually submitting invoices regularly, sometimes as often as every day.

Is the COVID-19 pandemic making invoice factoring more popular?

In the wake of the novel coronavirus, Neglia says, “I think I’ve seen a little more volume. Businesses have slowed down their invoice payment, and I think it’s causing businesses to seek out factoring more. But we’re being careful – we’re getting business because clients have customers who can’t pay their invoices. If the debtor is slowing down payments, the factoring company might not want to fund that invoice. They’re not candidates for factoring.” Remember that you should only use a third-party factor if you’re working with reliable debtors. “We only fund account debtors who are solid, and we do credit checks,” Neglia says. “We want to make sure they pay their invoices.”

What’s the difference between an invoice factoring company and a collections agency?

“A factoring company is different in that it is collecting invoices that are not necessarily past due, or ‘bad,’” says Neglia. And factoring companies serve only to accelerate cash flow—they do not take on credit risk. The client must repurchase their invoice from the third-party factoring company if the invoice is not paid after 90 days. At that point, a business owner might choose to pursue their unpaid invoice with a collections agency, file a claim in a small claims court, or hire an attorney.

Should I use invoice factoring?

Invoice factoring is useful to companies that have a lot of invoices, and who need payments quickly to operate. Many freelancers will find that they’re better off waiting to receive their full amount, but should also make sure to have contracts in place that set clear payment terms. Net 30 days is standard, although you’re free to negotiate a shorter timeframe. Make sure you have a contract with your client that includes language about assessing late fees and don’t be shy about following up on unpaid invoices, perhaps with a letter from your attorney, or a boiler-plate collections form with an attorney’s signature. Depending on the amount, you might want to pursue the matter in small claims court or consult with an employment attorney.

Wingspan is here to help you streamline invoicing and follow up on late payments. Sign up for a 30-day free trial of Wingspan today.

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