If you struggle to obtain funding through traditional lenders, factoring provides an effective alternative.
The process is simple. We buy accounts receivable (invoices) from businesses and then collect payments from clients. This streamlines the collection process for businesses, leading to several useful advantages including faster access to cash and increased back-office efficiency.
Unpaid customer invoices give businesses access to immediate cash. Clients can meet existing financial obligations, grow their businesses, and avoid the hassles of bank loans and cash advances.
At Ironwood Finance, we offer convenient invoice factoring at reasonable rates. Explore the advantages of this solution for your business or clients.
What Is Invoice Factoring?
Invoice factoring is a type of financial transaction that allows businesses to quickly obtain financing without facing some of the challenges associated with a traditional loan.
Invoice factoring is not the same as a loan. You do not need collateral and credit.
With factoring, you sell unpaid invoices and receive an initial advance equal to a percentage of the total sum minus a factoring fee.
The fees average 5.5% to 8.5%, depending on the amount and overall financial risk of the transaction for the factoring company. The percentage used for the initial advance also varies between 80% and 90%.
The factoring company then collects payment from customers for the invoices. After collecting the invoices, the factoring company pays the remaining value.
Basically, invoice factoring allows you to receive cash for invoices that you would normally need to wait 30 to 90 days to receive.
Is Factoring Right for Your Business?
An increasing number of businesses are relying on alternative financing solutions instead of obtaining loans from banks. Many financial experts already predict that 2020 will bring more demand for merchant cash advances (MCAs), peer-to-peer lending, online lenders, and factoring.
For many businesses, factoring may provide the most effective option. However, choosing the right financing path depends on the situation.
For example, businesses that cannot obtain traditional financing or need fast access to a positive cash flow benefit most from invoice factoring. It is also a more suitable solution compared to MCAs.
Unexpected financial issues, production delays, and declining profits are common reasons for needing fast cash. In some cases, a business may not have the luxury of waiting for customers to pay their invoices.
Unfortunately, obtaining a bank loan is not much quicker. It may take a month or longer to apply for a loan, get approved, and receive the funds in a business account. Businesses also need to worry about credit approval, cash flow, debt, and collateral.
Due to these challenges, many businesses turn to MCAs to deal with their financial burden. However, MCAs come with a variety of drawbacks, including high costs.
MCAs Versus Invoice Factoring
While factoring uses existing invoices, MCAs rely on estimated future receivables. The increased risk brings higher fees. Invoice factoring provides several great benefits compared to MCAs:
- Offers better long-term growth prospects
- Maximizes available cash flow
- Improves your lending profile
- Increases back-office efficiency
Do not assume that MCAs are your only option. Take a closer look at the advantages of invoice factoring.
Create Better Long-Term Growth Prospects
Lenders earn high commissions with MCAs. However, MCAs also tend to place businesses in a difficult situation. Borrowing against future receivables lowers the debt-to-income ratio of the business, hurting its lending profile and access to cash.
While an MCA may bring higher commissions, it increases the risk of failure for small to medium-sized businesses. Invoice factoring is less likely to cause a negative financial situation for SMEs, increasing the long-term potential of this financing option.
By helping your clients grow, you maintain your client base for future factoring contracts. When these businesses need to obtain funding in the future, they are more likely to retain your services.
Maximize Available Cash Flow Immediately
Loans limit your cash flow while factoring increases it. When you obtain a loan or MCA, you are speculating on future sales by taking on more debt, which decreases your cash-to-debt ratio. This places businesses in a negative situation and limits their ability to obtain traditional loans.
Invoice factoring maximizes cash flow instantly using invoices on existing sales or contracts. In some cases, you can receive funding within several days.
Improve Your Lending Profile and Pay Off MCAs
For those that already have MCAs, you understand the potential risk of borrowing against estimated sales. When you borrow funds based on the future income, you may become trapped in a cycle of debt and expensive cash advances.
MCAs limit your lending profile, making it more difficult to get out of debt. Invoice factoring offers a way to pay off existing cash advances. Businesses can remain afloat without taking on more debt.
Improve Back-Office Efficiency with Factoring
Many factoring companies handle collections for purchased invoices. This eliminates the need for your back office to deal with collection calls and a detailed invoicing process.
The time saved handling billing and invoice collection increases the efficiency and productivity of the back office. Businesses have more time and freedom to focus on primary responsibilities, such as running a successful company.
Ironwood Finance Helps You Succeed
If you require factoring, contact the experienced team at Ironwood Finance. We work with businesses and lenders of all sizes. Whether you need to obtain financing for your SME or a client, we deliver specialized service.
Many of our clients help set up financing for SMEs. Working with Ironwood Finance provides several distinct advantages for you and your clients:
- Ironwood works with troubled companies,
- gives lenders a facility fee,
- offers high commissions to lenders,
- can graduate clients to larger companies,
- and has a high record of successful contracts.
No matter the financial situation, we can likely work with your client even if they have an existing UCC, MCA, or judgment against them. For more difficult situations, we may be able to set up a non-notice of assignment.
Ironwood Finance helps your clients obtain financing quickly using invoice factoring. Grow your business by helping your clients succeed. Contact us today to learn more about our factoring solutions.
It Matters with Matt
Written by Matt Rojas
Rojas is a Senior Lending Officer, ISO Manager, Underwriter, and Factoring Specialist for Ironwood Finance since 2015. His team provides educational information to the small business community, which covers topics such as business financing, education, customer service, and much more. If you’d like to see a topic covered on the Ironwood Finance blog, or be featured please email him at matt@ironwoodfinance.com
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