Invoice factoring is becoming increasingly popular for businesses looking for alternative funding. If your company hasn’t been around long enough to build a good credit score, invoice factoring can provide the financing solution you need. Traditional financing options often have stringent requirements. You won’t have to worry about that when you apply for invoice factoring.

What is Invoice Factoring?

Let’s start with the basics. Before you understand how invoice factoring for construction companies in Canada works, you’ll need to know what invoice factoring is. It’s a financial solution wherein you sell unpaid invoices to a factoring company. Factoring is sometimes referred to as debt factoring while unpaid invoices are accounts receivable. Factoring companies buy the invoices but at a discounted rate of their total value. They also handle the payment collection.

Why is Invoice Factoring Good for Business?

Invoice factoring offers businesses a host of benefits. Chief among them is that you can start providing longer payment terms to clients. That helps improve client satisfaction and get you more prospective customers. However, extending the payment terms means your business needs to stay afloat while waiting for those invoices to clear. Not many companies have enough cash flow to sustain that arrangement. Invoice factoring helps bridge the gap by providing the necessary funding.

How Does Invoice Factoring Work?
Now that you have an idea of what invoice factoring is and what it does, you’ll understand the process easier.

  • Submission of the invoice. The first step is to send the invoices to a factoring company. Wait for confirmation from the company.
  • Check your eligibility. Once the factoring company checks the invoices and determines they are eligible for the exchange, the company pays you a percentage of the total value of the invoice, usually around 70 to 90 percent of the value.
  • The company also collects the remainder of the invoice when they are due. They send a notice to the customers about that, informing them that the invoice company is handling the payment collection.
  • Once customers pay in full, the company sends you the remainder of the payment. Their fees have been deducted from the amount, though, so keep that in mind. Check to make sure the numbers match up.

What are the Rates?

Invoice factoring comes with main fees: the service fee and discount fee.

  • The invoice factoring company charges a service fee, which is the main admin fee. It’s usually about 1 to 2 percent.
  • The discount rate is the percentage of the amount your company uses every month and runs between 1.5 to 5 percent of the total of the invoice.

Can Your Business Use Invoice Factoring?

Like any other financial transaction, you must understand the risks before you choose invoice factoring. Here are some of the factors to consider:

  • Time frames
  • Potential risks
  • Your company’s reputation and credit score
  • Size and origin of the invoices

Use these considerations to help you determine if invoice factoring can help your cash flow, business expansion, and improved bottom line in the long run.