Which is Better? Invoice Factoring or Line of Credit

It's not unusual for SMEs to reach a point early in the startup stage or as they gain traction, where they experience cash flow problems. Often caused by fast growth, financing can quickly solve cash flow problems.

However, obtaining business financing can be a daunting ordeal for business owners. With various solutions, each with its pros and cons, it's hard to decide the right choice for your business. 

This article discusses two alternatives to cash flow issues; invoice factoring and line of credit. They offer almost similar advantages but can pose disparate impacts on your business's financial future. Read on to compare the two and know which is better for your business. 

What is Invoice Factoring?

Invoice factoring entails borrowing against slow-paying receivables. The factoring company advances cash against the value of your open invoice in exchange for the right to collect against it. The factoring company makes the payments in two installments; 85% once it receives the invoice and 15% once your client pays the invoice in full. 

Pros

• Easy to process and set up

• It simplifies the time-consuming and challenging task of collecting receivables.

• Eliminates the issue of debt for your business

• Let you take advantage of business opportunities on a timely basis.

Cons

• The amount available to your business once you factor in an invoice is directly tied to the amount owed to the outstanding invoice.

• Your business's credit rating and that of the client who submits the invoice for factoring influence the charging rate.

• Your fee increases as long as an invoice remains outstanding.

What is a Line of Credit?

Line of credit is a concept widely known and yet generally misunderstood. A line of credit is an institution, usually a bank, which provides you with funds up to a certain amount referred to as the credit limit. While drawing funds from the line reduces your available funds, paying back the line increases the funds available. As long as you make payments, your business can keep drawing against the line. 

Pros

• When interest rates are low, lines on bank credit lines reduce as well.

• A line of credit solidifies your partnership with your bank, with prompt payments enhancing your business's credit standing.

• A credit line's accessibility gives your business almost immediate access to funds as needed.

Cons

• Tricky to obtain depending on financial conditions and the commercial lending climate

• The bank may impose changes on matters on your credit line as they wish

• Bank lines of credit may turn very expensive even during a low-interest rate climate.

• A bank line of credit automatically accrues debt to your business's balance sheet.

Differences between Invoice Factoring and a Line of Credit

Ease of setup

The factoring setup process is relatively easy if the invoice and your client qualify financially for invoice factoring. To obtain a line of credit, the institution offering it must financially review your business, which could take days or weeks. 

Communication with your client

The factoring company takes over your invoice and all communications with your client regarding payment. With a line of credit, your client isn't involved in the communication at all. 

Cash availability

Factoring dictates that you don't get paid until you've invoiced your client, which forces you to source cash from elsewhere to start your project. You can access a line of credit any time once you establish it.

Credit Limit

With a line of credit from whichever institution, the credit you qualify for depends on your business's credit history and financial statements. For factoring, the credit limit depends on the number of your accounts receivable. 

Bottom Line

While the ultimate financing choice for your business is yours to make, the easier and more readily available option is invoice factoring. 

Crown Financial is in the business of invoice factoring. Contact us to learn more about our invoice factoring packages. 

Who Needs Invoice Factoring Services?

It's frustrating when your business experiences cash flow fluctuations due to payment gaps in the accounts receivables. What that means is, you won't have enough cash to keep your business moving as fast as you would want to. Fortunately, you can take advantage of invoice factoring to get your business back on track. Factoring gives you a cash advance of up to 90% of your original invoice. If your business is in the following industries, then you can benefit from invoice factoring.

Oil and gas Invoice Factoring

Whether you are in a small or medium-sized oilfield business, you can still use factoring to secure financing. Oilfield service factoring ensures you are paid right away. You can extend your credit terms to attract new customers. Here are some benefits of factoring for the oil and gas industry.

• Fast financing: The approval for factoring takes 3 to 5 business days. Factoring companies transform your accounts into cash instantly.

• No maximum financing amount: As long as you have outstanding invoices, you'll get the cash you need. You'll only factor in the clients you want to factor.

• Administrative support: The factoring company will handle the collections, credit reports, and online reporting at no extra charge. You can, therefore, invest in building your client base.

Staffing agencies Invoice Factoring

One of the challenges staffing agencies face is promising to pay workers on a contract basis on behalf of their clients. If you fail to pay the contractors, they will not work. As a result, it affects your client's operations.

When your clients don't pay their invoices for 30 days or more, what do you do? You turn to invoice factoring companies. You'll get the working capital you need by using invoice factoring for staffing companies. You can solve payroll issues, recruitment, and hiring costs by using invoice factoring. Factoring ensures you have a consistent funds flow, which gives you the confidence to bid on larger projects.

Manufacturing Invoice Factoring

Manufacturing companies have to buy large materials, pay overheard and contractors, and rent space. It is also common to offer customers long-term payment plans to remain competitive.

However, manufacturing companies with low cash flow will be unable to offer their customers trade terms. Invoice factoring allows you to continue attracting customers and maintain your cash flows.

Telecom Invoice Factoring

Waiting for 30 days or more for customers to make their payment can be challenging, especially when you have bills to pay. Invoice factoring is an excellent way to get the cash you need faster. Telecom and wireless companies that use invoice factoring don't have to wait for 30-60 days for carriers to make their payments.

You can get 90% of the invoiced amount when the invoice is generated. You can use the cash to meet your payroll, pay your bills and even invest in new resources. Invoice factoring allows you to speed up your cash flows.

Aerospace Invoice Factoring

Aerospace factoring is an excellent way to solve your cash flow problems in the aviation industry. You no longer have to wait for 30 to 90 days to receive payment from your customers.

Invoice factoring allows you to build enough cash flows to meet your customer demands, expand your business and pay your customers on time. The factoring company takes care of the back-office services, including free credit analysis and customer collection. You'll have more time to focus on growing your business.

If you are struggling with cash flow issues, Crown Factoring Services is here to help. We have served several industries and understand what it takes to build a successful business. You'll get your invoice advances in 1 or 2 days. Get in touch with us today to get started with your application process. 

When to Consider Using an Invoice Factoring Company

Businesses that need working capital and haven't been able to secure a traditional line of credit or are having trouble collecting from slow-paying clients should consider invoice factoring.

Invoice factoring is how a company can secure capital for its creditworthy invoices. A factor buys invoices from a company and pays the company at a discount in advance.

Every company must receive payment for goods and services. It's simple at its core, but companies cannot overvalue the importance of ensuring a continuous cash flow. 

The time between invoicing services or goods and the receipt of payment can be challenging, especially for a business lacking adequate operating capital or effective cash-flow management strategies.

Most business owners understand the significance of managing cash flow. An unexpected—and unwanted—dip can force a business to seek immediate help. Knowing when to turn to invoice factoring as a financial solution is just as important. 

Below are common reasons a company should inquire about invoice factoring services.

You're in A Cash Flow Crunch

Cash flow isn't just a metaphor – it is the lifeblood of companies; it gives a business the flexibility to meet unexpected expenses and invest in the future.

There are many ways to improve your cash flow. You can send invoices immediately, offer a discount for early payment, or strengthen your inventory by purging or splurging (if data supports this action). 

Business owners can also get help from invoice factoring. It's not just about acquiring money; businesses can also benefit from reduced borrowing costs by taking advantage of invoice financing. It's similar in some ways to traditional bank loans, except it's cheaper because there's no collateral needed. 

If:

• Capital costs are lower than the cost of borrowing from banks.

• The business needs cash quickly.

• Cash flow is tight, and the company does not qualify for bank financing.

Then, invoice financing can help.

You need work capital, but no bank will lend you money.

Securing working capital is one of the primary reasons companies choose invoice factoring. 

If you need capital for daily operations, your bank may not help you. Even if they do, the process can often be slow and frustrating as it takes time to get approved and then finalized.

Let's say you're a business owner who has just landed a new client with a $50,000 project. If you have no other means of securing financing from another bank or lender, then you must wait until you've completed the project to receive payment from your client. 

If you have to wait for completed projects, your business will have to live off of the cash in your bank account. If your business is like most businesses, you won't have enough money to sustain operations for that long.

Banks know this, which is why they're hesitant to provide short-term lines of credit to new and small businesses.

You need to build and maintain a healthy inventory.

Inventory is a necessary evil. Business owners must have inventory to sell products, but they must also pay for the product upfront; this can cause issues because businesses don't always sell every product they purchase. Having excess inventory on hand can be as bad as not having enough.

You want to finance a new inventory order. You can't afford to tie up all your available capital in inventory purchases. It's vital to save some money every month, but it's also imperative not to let your cash flow become so tight that you miss out on good opportunities.

Trying to finance your growth through traditional bank loans is difficult. Banks rarely lend money for inventory purchases, and if they do, the interest rates are high. 

One of the benefits of using an invoice factoring company is that it allows you to get the cash you need before selling your products. Invoice financing gives you a percentage of what your invoices are worth right away, whether or not you've sold anything. That cash infusion helps to grow your business without waiting for customer payments.

You Need To Make Payroll

There are many reasons why businesses get into payroll crunches. Some problems are temporary, some are permanent, and management mistakes cause others. Here are some reasons that payroll problems can occur: 

• Oversight. Payroll is often one of the last items on the agenda when there is a meeting to discuss business planning for the upcoming month. That means that sometimes payroll gets overlooked.

• Temporary issues. If there is a quick drop in sales or an increase in expenses, payroll may need to be temporarily adjusted until things go back to normal.

• An employee leaves without notification. Sometimes, an employee will quit without giving proper notice and then leave the company holding the bag as far as what they owe in terms of final paychecks or other obligations related to employment, such as COBRA or health insurance costs.

• Bad payroll process. Incorrectly setting up the budget for payroll can cause problems managing the process. The budget needs to be set up correctly from the beginning, with adequate reserves for taxes and other costs of doing business expenses so you can avoid payroll issues.

The ability to recognize the warning signs of a likely payroll crisis will keep your doors open today and provide opportunities for a successful future.

You Want To Take On More Projects

You want to take on more business projects. How are you going to afford all this growth? Invoice factoring can help. Factoring is a simple way to grow your business by tapping into your customers' credit. 

When you accept a job from a client:

• Factor in their invoice immediately.

• Factor the invoice before you do any work.

• Factor it in before you buy any materials or hire any subcontractors.

You can get paid directly after factoring in their invoice, even before delivering the project to them. Use that money to finance the cost of labor and materials and overhead expenses like equipment, insurance, taxes, and rent. 

You'll be surprised how many new projects you can take on when you have that extra cash flow fueling your engine.

Invoice factoring works well for both large and small businesses. For small companies, it's an excellent way to generate immediate capital without having to take on a loan or use existing assets as collateral. For larger companies, invoice factoring provides an efficient means of managing accounts receivable, increasing cash flow, and reducing business costs.

Crown Financial, LLC provides financial flexibility to companies that need it when they need it. Contact us today to discuss how invoice factoring can help your business.

Invoice Factoring For Small and Medium Businesses

Credit is an effective way to make your products and services more attractive, allowing customers to pay later. It is common to find this practice in purchases involving large amounts of money or long shipping processes.

Well-established businesses can wait for unpaid invoices without a problem. However, small and midsize businesses struggle with cash to cover operational expenses and cannot afford to wait long. The money you get in-house enhances production and product delivery to your customers. Every business requires a flexible payment pattern to compete effectively.

Luckily, savvy business owners use invoice factoring as the most reliable solution in this situation. Let's find out how!

What is Invoice Factoring?

Invoice factoring refers to a method of financing a business to get constant cash flow by selling some of your unpaid invoices to another company offering factoring services. The third-party will provide money to ensure a proper money flow for business processes and stabilize income. The business gets the cash as they wait for customers to pay their outstanding invoices.

The factoring companies offer the business the cash they require almost immediately. Generally, they offer a slice of the unpaid invoice upfront then pay the remainder minus fees after collecting payments from the customers.

In a way, it operates as an on-demand business cash advance for unpaid invoices. If you decide to take an advance for outstanding invoices, you usually pay it for an extra fee after a certain period.

A small business can secure its credit line against unpaid invoices without affecting its relationship with clients through invoice factoring. It also enables them to retain control over their invoices and only borrow from the ones they choose.

Constant cash flow from factoring allows your business to avoid scrambling for money to pay bills. You will have peace of mind when you can get funds immediately with a click of a mouse or phone call.

How to Qualify For Invoice Factoring?

The requirements that qualify your business will be different among various factoring companies. The good thing is that they will not focus on your credit but solely look at your customer's creditworthiness when you submit their invoices. The standard requirements to qualify your business for invoice factoring include:

• You sell on credit terms

• Your company has a stable credit history.

• The buyers generate a turnover of over three million US dollars.

• The business has a turnover of over one million US dollars.

• Have a valid business bank account

• The company has a valid tax ID number

• Personal identification documents for business owners

When you meet the minimum criteria, you can apply for invoice factoring from the company of your choice. The process is straightforward, and you can carry it online. Access the accredited investors ready to offer to fund and send them the necessary details.

The Cost of Invoice Factoring

Invoice factoring is similar to any financial instrument where fees will vary according to the lender you choose to use. However, it is the most affordable form of financing for small and midsize businesses because you are borrowing what others owe you.

To determine your factoring rates, you may need to look at the following factors:

• The number of monthly receivables you wish to factor

• The type of industry you operate in

• The creditworthiness of your customers

• The average size of each invoice you factor

• Length of time customers take to pay

On average, factoring costs fall between 1-5%, depending on the factors above. The volume of invoices you will factor in will largely determine the costs. Larger volumes equal lower fees, and factoring companies also offer discounts depending on volumes.  Contact us at Crown Financial, LLC to learn more about invoice factoring.  

How to Qualify Your Business for Invoice Factoring

Everyone has big plans for their business. But, to achieve your goals, you must have cash. You need to pay your employees on time, increase stock, fund your internal marketing campaigns, and more. However, businesses face a common challenge where customers don't pay at preferred schedules.

You are likely to run short of funds when your customers take a lot of time to pay their invoices. Every day that passes without your invoices getting paid, your goals slip further into the abyss.

A business needs constant cash flow for smooth operations. So how can you resolve such issues? Some business owners decide to take loans, which sometimes is daunting to underwriting requirements. Other banks also take a long time to process loan applications. By the time a loan gets approved, you may have resolved all your issues.

Invoice factoring is the most popular and reliable way to fund your business in this situation. They are easier to qualify for than any other conventional financing. Anyone can be eligible for factoring since they do not build on your credit, rather the credit worthiness of your customers. It is the best viable option to finance your business when you have a poor credit history.

The following is the list of the major requirements you will need to qualify for invoice factoring.

Invoices to Factor

Unpaid invoices are arguably the most important thing to consider when looking for invoice factoring. After all, they are the ones you need to factor in.

Creditworthy Clients

Factors are more concerned with the credit worthiness of your clients than they are with yours. The main reason for this is because your clients are the ones who pay the invoices.

Therefore, it would be best to consider if your customers are the kind who honor debts, have solid credit, reputable relationships, and have good references with other vendors. If so, then you are an excellent factoring candidate.

A Completed Factoring Application

Factors require an application that will vary according to the needs. They will request business or personal contacts like phone numbers, email addresses, and other essential business details. It may also include the monthly invoicing volumes. Generally, the more information you have, the higher the chances of getting an accurate invoice factoring quote.

Accounts Receivable

The reports show all the unpaid invoices, notes by date, and credit memos. Factors use these reports to keep track of the outstanding invoices, the money pending, and when they are likely to receive payment.

It is an essential part of the factoring paperwork since it helps determine an accurate timetable for submitting the required paperwork for eligibility.

A Business Bank Account

Using invoice factoring means you are looking for funding to help boost your business. Therefore, you are going to need a business bank account. Factoring companies do not offer cash or transfer money to a personal bank account. They only send money to business-only accounts through wire or ACH transfers.

A Tax ID Number

You also need to provide a government-issued tax identification number. The factoring company uses the tax ID to check if your affiliated companies have all recent tax requirements. It also helps them to check if you may have outstanding liens.

A Form of Personal Identification

You must provide personal identification documents. The factoring companies want to ensure that the person they are offering money to is legitimate. Personal ID can be your passport, driver's license, or social security number.

Invoice factoring has numerous business benefits. With extra cash in hand, you can boost your business processes and pay all your bills to enable you to grow your business exponentially. Contact us at Crown Financial, LLC to apply for factoring and get the best rates in the market.

Recourse vs. Non-Recourse Factoring: Which Works Best for Your Business?

Invoice factoring is great for any business. In fact, it's one of the best cash flow solutions out there. You get to increase your cash flow, so you don't have to worry about operating expenses, payroll, and even business expansion. 

On the downside, we all have that one customer, you know, the one who delays paying their invoice, and in some cases, outright refuses to pay their dues. So, what happens in such a case? Who bears that financial burden? 

The outcome of this situation all comes down to the agreement you have with your factoring company. Like everything else in life, you get two choices; recourse and non-recourse factoring. So, what's their difference? Let's check it out.

Recourse Factoring 

Recourse factoring works as an agreement between you and the factoring company. You are expected to buy back the unpaid receivables from the factoring company in case of a non-payment. In this case, you bear all the credit risk.

One of the most attractive attributes of recourse factoring is that you can get funding regardless of your creditworthiness. This is because the factoring company protects itself through a contract that stipulates that the business (you) will bear the responsibility for any unpaid invoices.

This makes recourse factoring very popular among factoring companies since they don't bear any financial risks due to unpaid invoices. Heck, even the responsibility of dealing with the defaulting customer (either legally or through collection agencies) falls into your hands.

That being said, with recourse factoring, you get to enjoy less factoring fees and more flexibility on advance rates. So, when dealing with recourse factoring, you trade price to risk. If you have faithful customers, this might just be the best way to go.

Non-Recourse Factoring 

In non-recourse factoring, you get into an agreement with the factoring company whereby the factoring company bears all financial obligations pertaining to the unpaid receivables. In this case, your business remains unaffected by the unpaid receivables.

With recourse factoring, your financial benefits are literally two-fold. You get to solve your cash flow problems without any credit risk. This form of factoring also works like credit insurance in that you get access to your money on time and at no risk. On the downside, non-recourse factoring is synonymous with higher factoring fees. 

Which Factoring Type Will Work Best for My Business?

Like any other financial transaction out there, both recourse and non-recourse factoring come with distinct advantages and disadvantages. 

Benefits of Recourse Factoring

• Faster approval process

• More returns for invoices

• In most cases, the factoring company performs a credit check on your clients to minimize the risk of defaults.

• More affordable compared to non-recourse factoring

Drawbacks of Recourse Factoring

• The factoring company has the right to demand payment from you if your customer defaults.

• You essentially put your business's income and bank accounts at risk of being garnished. In case of non-payment, you have two options; you can either give the factoring company an invoice of equal value or pay back the invoice amount.

Benefits of Non-Recourse Factoring

• Better debt protection

• All liabilities of unpaid invoices are transferred to the invoice factoring company.

• No additional debts

• You remain protected if your customer goes bankrupt.

Drawbacks of Non-Recourse Factoring

• Not all factoring companies offer non-recourse factoring

• Not the best choice of your clients have a bad credit rating

Ready To Get Started?

Both recourse and non-recourse factoring can help boost cash flow in your business. And now that you know the difference between the two, you're better equipped to make an informed decision on which type to go for. Apply now and get faster cash flow with the best invoice factoring solutions.