Want to smooth out growing pains with invoice funding? Many businesses leverage invoice funding because it can be a debt-free way to increase working capital quickly. However, all invoice funding programs are not created equal, and there are nuances involved in each one. Use the tips below to ensure you get everything out of the experience.
1) Know the Difference Between Financing and Factoring
When people talk about invoice funding or invoice advances, they could be referencing one of two things.
Invoice financing is taking out a loan. Your lender assesses the value of your unpaid invoices, and offers you a loan based on the value invoice. As your customers pay you for their invoices, you make payments on the loan. It may work like a term loan with a set end date and monthly payments which include interest. Or, it could work like a line of credit — you’re allowed to draw until you reach your maximum. When you make payments, you’ll be able to draw until you reach your maximum again.
Invoice factoring is selling your invoices. Your factoring company pays you the majority of the invoice value, and then handles invoicing and collecting from your customers. Once an invoice is paid, the factoring company sends you the remaining balance, minus a small fee for the service. Some companies may prefer factoring over financing because there is no debt to pay back.
2) Shop for a Great Rate
Just like banks will offer different interest rates, companies offering invoice funding will be different, too. Be aware: sometimes companies offer initial rates or rates based on volume. If you don’t meet your monthly minimums, you’ll be charged a higher rate.
3) Do the Math
A good starting rate is important, but some products and loans will have interest and others will have fees or a mixture of the two. Always be sure you break down what your total cost will be. For example, if it’s a loan, be realistic about how long it will take to pay it off and calculate the actual fees and the interest you’ll pay over time.
4) Check for Value-Added Services
Sometimes companies will do extra things for you that can save time or money. For example, when you work with a factoring company, you don’t need to worry about invoicing or collections, so you should include those savings when you crunch your numbers. You may also qualify for discount programs and other benefits, so be sure to ask.
5) Perform Diligence Checks
It’s always a good idea to run searches on the companies you’re considering doing business with to ensure others have had good experiences.
6) Identify Your Point of Contact
Always find out who you can touch base with at the company and don’t settle for a generic 800 number or general customer service line. At Interstate Capital, each of our clients is matched with an account manager who is their main point of contact for all concerns, but not all companies offer this nor are they as diligent about staying in touch.