Invoice Factoring

Invoice Factoring: What is it and how can I use it to grow my business?

You’ve invoiced your customer and you’re waiting to get paid. In the meantime, you still need to invest time, material and labor into delivering products and services to keep your business moving forward. You realize that you need funds to bridge the gap between invoicing your customers and receiving payment but how do you obtain those funds? Invoice factoring might be the solution.

Problem: You need money now to cover business expenses, but your customers are on long payment cycles. You typically must wait 30, 60 or 90 days before getting paid on outstanding invoices.

Solution: Invoice factoring allows you to turn existing outstanding receivables into cash that can be used immediately.

What is invoice factoring?

Invoice factoring is a working capital financing solution that is best for small business owners who don’t get paid for delivering their goods and services right away but need cash to run or grow their businesses while they wait to receive payment.

How does it work?

You sell your customer’s invoice to the bank or factoring company at a discounted rate. The bank or factoring company then advances you up to 95% of the invoice. You can then use this money to cover important day-to-day business expenses like inventory or payroll, or even take advantage of new growth opportunities such as expanding to a new location or taking on additional business. When the invoice is due, the bank or factoring company will then collect the payment directly from your customer and will send you the remaining balance owed, minus a factoring fee (discount fee), which is typically a percentage of the invoice amount.

Invoice Factoring

 

Here’s an example:

You’re a business owner who distributes aviation parts to customers. You invoice your customer $100,000 to cover the cost of your product. The invoice is set to be paid in 60 days. You’re waiting on payment from your customer, but you’re being asked to quickly pay the manufacturer who supplied the aviation parts.

 

The invoice factoring transaction could look like this:

Amount invoiced to customer: $100,000

Cash advance (90% of invoice): $90,000

Factoring fee (2%): $2,000

Remaining advance value once invoice is paid (8%): 8,000

Total of what you receive: $98,000

 

How is factoring different than a loan?

Invoice factoring is a great option for businesses who need access to money quickly but aren’t able to obtain a conventional bank loan. It allows owners to get the cash they need to grow their businesses without having to take on additional debt, which would be the case with a traditional bank loan.

 

How you benefit by working with us:

At Live Oak Bank, we have the ability to price our factoring fees more aggressively than traditional banks, and we also have the flexibility to give you a factoring product that is unique to your business. Below are additional benefits our customer receives when taking advantage of our factoring product:

  • Advance rates up to 95%
  • Continuous funding
  • Competitive factoring fees
  • Concierge service with an experienced account relationship manager to help manage your client’s account and provide monthly reviews
  • Ongoing, 24-hour funding after initial credit approval
  • Designed for companies with $2 Million – $50 Million in sales
  • Facility size between $500,000 and $10 Million

If you’d like to learn more about the working capital solutions we offer business owners or connect with one of our experienced lenders, click here.