What is invoice factoring?
Invoice factoring enables a business to get access to the cash tied up in outstanding accounts receivables through the sale of the receivables or invoices to a factoring company. This can be a great way to finance a business as it provides a working capital source that grows with a business. Once an invoice goes out for a job that has been completed, often there is a still a 30 -90 day wait time before the client pays the invoice. This creates the receivable and is what the factoring company uses as collateral to provide the working capital.
How does invoice/accounts receivable factoring work for delivery companies?
Invoice factoring works great for delivery companies. These types of businesses often have quality receivables and are in need of working capital due to the hard costs of running this kind of business; such as payroll, fuel and insurance costs. Often, last mile delivery companies will have scanning or online systems which enable a factoring company to easily verify that the work has been completed and is approved for payment. Thus, the funding can be very seamless and efficient. Long haul trucking or freight companies usually have bills of lading which enables quick and easy funding for these types of businesses as well.
How does the factoring process work?
Note: All advance rates and discount rates or fees are agreed upon in advance while being set up.
Step 1: The delivery company submits their invoices to the factoring company to receive 80% to 95% of the amount of the factored invoices the same or next day. For example, if you sell $500,000 worth of accounts receivables and get a 90% advance, you will receive $450,000.
Step 2: The invoice factoring company holds the remaining 10% or $50,000 as security until the payment of the invoice or invoices has been received.
Step 3: The factoring company collects payment over the next 30 to 90 day period depending on your client’s payment terms.
Step 4: Once the payment has been received, the factor pays you, (the delivery company), the remaining 10% less the factoring fee, which typically runs 1% to 3% of the total invoice value.
We have had some wonderful examples of delivery companies that have come to us and have grown at a rapid pace due to providing the working capital they need. If you would like to discuss further how factoring could work for your delivery business, sign up today or give us a call at 877-648-3709 toll free.