Under these arrangements, factors will evaluate the creditworthiness and collection history of your customers to determine if they will purchase the invoices. In non-recourse agreements, the factor takes on the collection risk. These agreements are generally structured as recourse factoring, non-recourse factoring, or a combination of the two. The type of invoice factoring arrangement will also impact the attractiveness of this option. Factor fees can range up to 5% of the invoice value for each month the invoice is outstanding. Invoice factoring is usually more costly than traditional financing provided by banks. The biggest deterrent to invoice factoring is the cost. While the concept of taking advantage of cash that is already outstanding may seem like a no-brainer, invoice factoring will not be the best solution for all consumer products companies. Factoring may be particularly attractive to companies with quality customers who are in need of immediate cash flows and who are willing to pay the associated fees. Invoice factoring can become the cornerstone of a company’s financing strategy since the financing line can easily grow as invoice balances increase, making invoice factoring a potentially attractive option for companies that need their financing to keep pace with their growth. Additionally, most factoring arrangements provide for customer credit checks, relieving the company of the time and expense of providing this important function. Since invoice factoring takes advantage of already outstanding receivables, it does not require additional collateral and likely involves a shorter approval process than traditional bank financing. When companies sell their invoices for factoring, they typically receive a percentage of the invoice value upfront in the form of an advance, with the remaining balance, less factoring fees, remitted to the company once the invoice is paid. Invoice factoring is a popular option for consumer products companies as it provides immediate cash flow for short-term financing needs, as opposed to waiting 30, 60, or even 90 days for an invoice to be paid. This is the practice of selling your accounts receivable invoices to an external vendor. Outside of traditional business financing, many consumer products companies choose invoice factoring. If you’re looking to cover operating or material costs, improve cash flow, or even fund an expansion, it’s important to identify which option is right for your business. Whether it’s through a traditional bank or an alternative lender, consumer products companies have several viable options to leverage. Financial Services GroupĪ fundamental part of any successful business plan is determining how and where you plan on acquiring the necessary funding to operate and grow.
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