If your business has a less-than-perfect credit rating, or your company is having difficulty obtaining investments or a loan, invoice factoring can be an extremely beneficial funding alternative. Invoice factoring companies base their decision on more than the business credit score when deciding who to work with.
What is Invoice Factoring?
Invoice factoring is a means for your business to get quick payment on your invoices instead of waiting the usual 30-90 days to receive payment from customers. It is not a loan, so your business will not incur additional debt. Instead, a factoring company will purchase your invoices and make payments directly to you based on the value of those invoices.
How Do Factoring Companies Choose Clients?
Since invoice factoring is not a loan, applying for this type of funding does not require a business to have impeccable credit or to have been in business for several years, and it requires less underwriting than traditional loans.
Factoring companies do not rely solely on a client's creditworthiness when making their decision to factor its invoices. More emphasis is placed on the financial stability of the client’s customers. This can prove useful when more traditional methods of finance don’t work for a company.
Businesses considering invoice factoring must provide:
- Accounts receivables/Payable aging report: This document enables a factoring company to verify your customers and assess their creditworthiness. The more details you have about your customers, the better.
- Articles of organization or incorporation: These documents are essentially your company’s “I.D.” Invoice factoring companies ask for these documents for similar reasons that a store clerk might ask for identification when you use a credit card: it enables the factoring company to verify the identity of your business (by ensuring that your company is legitimately set up and filed with the appropriate agencies, government or otherwise) and to prevent fraud.
- Most recent tax returns (personal or business): The reason invoice factoring companies look at tax returns is to check for delinquent tax payments or tax liens. Basically, if there is a history of delinquent tax payments, the IRS can file a tax lien on corporate assets, giving them a claim against the invoices a business may want to factor. This means that the IRS can claim the proceeds from a factored invoice before the factoring company, which may cause the prospective client to be denied factoring services.
- Completed invoice factoring application
Once approved, the process of invoice factoring is straightforward:
- The client submits invoices for payment.
- The client is paid the majority of the value of the invoices - in as little as 24 hours in some cases.
- After a customer pays an invoice, the factoring company will deduct fees and pay the client the remaining balance.
How to Start Invoice Factoring
The process to get started with invoice factoring is simple. Once approved, you may start receiving payments in as little as 24 hours. Contact Bay View Funding today to learn how invoice factoring can help you receive invoice payments right away.