Invoice factoring is a transaction that consists of a business selling its invoices at a discount to an external financing company (factor/factoring company). Factoring companies usually advance between 70 to 90 percent of the invoice value upfront. The remainder of the invoice is remitted once the invoice is paid, less a fee.
Invoice factoring has names such as receivable factoring, or invoice financing. Some forms of invoice financing allow business owners to secure short-term loans using unpaid invoices as collateral.
There are three parties involved in the process of invoice factoring:
the business owner, the customer of the business owner, and the factoring company.
The business owner kicks off the factoring process by deciding which factoring company they would like to engage. Once both parties agree to work together, the business owner can proceed by selling their outstanding invoices to the factoring company for working capital. Upon verification by the factoring company, the factor pays the business owner 70 to 90 percent of the invoice. When the business owner’s customer pays the invoice, the factoring company pays the business owner the remainder of the invoice, after deduction of fees.
As with everything, there are benefits and disadvantages to invoice factoring.
The pros include obtaining quick access to working capital and the ability to offer flexible, extended net terms to clients without worry.
The cons are that factoring is not readily available to companies without reputable clients, it is more expensive than traditional bank financing, and there is a potential liability for overdue invoices.
With that said, the decision to engage a factoring company should be dependent on your business needs as well.
Factoring terms and rates are dependent on factors such as (but not limited to) the business industry, volume of invoices, type of service, net terms of the invoice, quality of clients.
With that said, factoring companies usually follow either a variable or flat fee rate.
Overall, the more invoices you factor, the lower your rate will be.
Flat fee rates are more cost-effective if you have many clients that constantly clear well before their net terms, or if you plan to invoice occasionally.
Variable fee structures are also known as tiered fee structures. Factoring companies tend to discount a small percentage of the invoice, as long as it is outstanding; which means the longer your fees go unpaid, the more costs you’ll incur over time.
While variable fee structures are complicated to calculate, it’s cost-effectiveness is dependent on the profile of your business, as the rate is reliant on the risk of the account.
A flat fee is true to its name- the rate remains regardless of how delayed the invoice is.
However, flat-rate fees are customarily higher than the variable fees. Flat-rate fees are calculated by multiplying the face value of an invoice with the flat fee.
It is always good to be aware of the fees or penalties you might incur. Here are some of the common ones.
Termination fees: a significant cancellation fee may be incurred if you cancel a long-term contract. Cancellation fees can range from 3 to 10 percent of your factoring credit line.
Monthly Minimum Fees: Certain companies require businesses to factor a minimum amount of invoices per month. If a business entity fails to do so, the factoring company will charge an additional fee.
Maintenance Fees: This fee is contracted every month, to keep your account open with the company.
Due Diligence Fees: This fee is charged whenever the factoring company does a background check of your client, to ensure that your client is capable of paying the invoice. Due diligence fees can cost anywhere between a few hundred and a few thousand dollars.
Think about the needs of your business, and seek an invoice financing company that is flexible enough to cater to those needs. As a guiding principle, you should look for a partner that you will be happy to have long-term and avoid settling for anything less.
Multiply can improve your company's cash-flow so you can focus on the bigger things. As the leading invoice financing company in Singapore, Multiply aims to streamline the process of invoice factoring for SMEs. Our invoice factoring products are cost-effective and simple to engage, offering businesses an easy solution to maintaining cash-flow.
In addition, Multiply simplifies the invoice factoring fees. We have:
No Termination fees,
No Monthly Minimum Fees
No Maintenance Fees
No Due Diligence Fees
Our account is life-time free of charge.
Visit our website at https://www.multiply.com.sg for more details, or reach out to us at +65 8775 0069 for a free quote.