Having an accounts receivable pipeline is part of running any business that invoices customers. Managing a business’s cash flow is time-consuming and creates stress on the company’s finances. As a business owner, you rely on invoice payments to pay your bills, purchase inventory, and fund other operational costs. When your business has lots of unpaid invoices and you’re low on cash to meet your financial obligations, you may need to consider invoice factoring. Factoring is sometimes referred to as accounts receivable financing.
Many years ago, my business was doing about three million in annual revenue when we won a $1.2 million contract. As you might imagine, on the day we got the call that we won the contract, we were pretty happy. Fast forward about two and a half months and I was looking for ways to put myself out of my misery. You see, we were a service company. We would work for a month and then bill our client for the previous month’s work. For this contract, we were billing the client about $100,000 per month. Once invoiced, the client then had 30 days to pay us according to the terms of our agreement. After two months, we had billed $200,000. In spite of our net 30-day terms, the client had not yet paid and we were out of money. With payroll looming, we needed cash fast. That is when I learned about factoring.
A wiseman once told me:
“If your business is successful, you will need more money. If your business is unsuccessful, you will need more money.”
He was right, we were on a growth curve but our accounts receivable pipeline made us miss payments to our vendors, which had the potential of affecting our credit and of course the relationship we had with our employees if we were unable to meet payroll.
What is Factoring?
Factoring companies specialize in financing invoices from businesses that have cash flow issues. Accounts receivable financing companies don’t technically lend money like banks. Instead, they purchase the accounts receivable invoice from the business at a discount. The business gets immediate funds for the receivable. The factoring company holds the invoice and makes a profit when the invoice is finally paid by your customer.
When you sell an invoice to a factoring company (also known as the factor), the factor will usually pay you between 85-90% of the invoice’s face value within 24 hours. The balance is kept in reserve from which the factor will deduct its fees once the invoice is paid by your customer.
When you factor invoices, you get to choose which invoices you want to factor and which ones you want to get paid the old fashion way. We simply added a “Remit to” sticker on the invoices we sold to the factor, so our customer knew where to send the payment.
When your customer finally pays the full amount of the invoice to the factor, the factor deducts its fees from the reserve it still holds, and forwards any remaining reserve funds to you.
The main reason that companies factor their accounts receivable is to get their invoices paid quickly, rather than waiting the 30, 60, or even 90 days that it sometimes takes a customer to pay. How much a company factors will depend on its unique business needs. Some companies factor all of their invoices, while others may only factor invoices when they have a short-term cash flow need. With factoring, your business can increase its cash to pay employees, handle customer orders, and take on more business.
Companies of all sizes, from one-person businesses to Fortune 500 corporations, use factoring as a way to manage cash flow.
Two Kinds of Factoring
There are two main types of factoring. Recourse and non-recourse.
Recourse factoring means that you will ultimately take responsibility for the payment of an invoice if the factor cannot collect payment from your customer just as with a disputed invoice or if the client has not paid after 90 days.
Non-recourse factoring means the factor assumes some of the credit risk for collecting on an invoice. Generally, the risk is limited to the client filing for bankruptcy. As a result of the increased risk on the part of the factor, non-recourse factoring has higher fees than recourse factoring. In most cases, even if you are using non-recourse factoring and the client has not paid for 90 days or disputes the bill, the factor will request reimbursement of the advanced funds.
The main advantage of working with a factor is that your cash flow improves immediately. You don’t have money tied up in slow-paying accounts receivable. Instead, you have cash on hand to pay expenses and take on new clients.
In addition to the cash flow advantage, factors can also help your business with credit decisions since they will rarely agree on buying invoices from your customers in financial difficulty. Factors can also help with collections.
Is Factoring an Option for Your Business
Factoring may be an option for your business if:
- Your clients pay net 30 to 60-days. Longer payment windows can make factoring very expensive since most fees are based on the invoice’s aging.
- Your clients have good credit, since factors may decline invoices from companies with bad credit or charge higher fees making factoring costs prohibitive.
- Slow payments or rapid growth are creating cash flow problems.
Setting Up a Factoring Account
Most factors can set up an account in 3 to 5 days. One issue that affects the length of time to set up a factoring account for a new customer is related to how long it takes you to review the documents and provide the information the factor requested as part of their due diligence process. The second issue that affects the time to set up a new customer account is the length of time it takes your customer to acknowledge the Notice of Authorization, that gives the factor the right to manage your receivables.
Factoring can be a confusing topic for many small business owners. Each factor has slightly different programs and tends to focus on different industries. The following is a list of several of the most popular factoring companies:
Is factoring your accounts receivable a viable option for your businesses cash flow needs?
What To Do When You’re Rejected For A Mobile Phone Contract
By Harriet Meyer
Many mobile phone contracts don’t require you to pay a penny upfront – even for the latest smartphone. Instead, you commit to regular payments over, say, 18 or 24 months.
But, just like other credit applications, such as for a mortgage or loan, you could be rejected for a mobile phone contract if you have a bad credit rating.
Here, we consider why you might find yourself in this frustrating position and – most importantly – what you can do about it.
Why was my contract application rejected?
It’s usually the first question on everyone’s lips when they have been turned down for credit. And the answer is that, essentially, the provider has checked your credit report and determined that you’re a high-risk customer who may fail to pay off your debt.
Providers use the information on your credit file to assess your history of managing money. So, if you’re rejected, this could be for one of the following reasons, or a combination of these:
- A history of late or missed bill payments, causing providers to see you as financially stretched, or someone who struggles to manage money
- Holding an account in joint names with someone who has a poor credit history
- You’re not registered on the electoral roll, so a provider may not be able to verify your identity and address
- County Court Judgements (CCJs) against your name, or Individual Voluntary Agreements (IVAs) on your credit record, indicating that you could face financial trouble
- Lack of credit history – you need some history of making regular payments to build up your credit history, and show that you can manage regular debt payments.
How can I check my credit score?
If you genuinely have no idea why you have been rejected, it’s worth checking your credit report. This way, you can find out what the provider was looking at when it decided not to offer you a contract.
You can do this at one of the three main credit reference agencies – Experian, Equifax, and TransUnion (formerly Callcredit). Experian offers a free service that enables you to sign up and check your credit score for a general overview. ClearScore is another free service that uses Equifax data.
The way credit scores are calculated varies between the different agencies, but they give providers an idea of how reliable you may be when you’re signing up for a contract.
What can I do if I’m rejected?
Remember that any financial contract is a commitment – so if you’re rejected, consider if it’s sensible to be signing up at all, particularly if you’re battling with other bills.
But whatever you do, avoid applying for a string of mobile phone contracts in the hope of being accepted. Each one will involve a credit search and leave a mark on your file, which could impact on your ability to get future credit, such as a mortgage.
The good news is there may be other options available which means you can still get a new phone or upgrade.
Find out more about your credit report with our guide.
Pay a deposit. The network provider may get around you having a poor credit history by asking you to pay an upfront deposit for the contract to offset any risk that you fail to make payments.
The amount of deposit will vary depending on your credit status, the package and the provider. You typically receive the deposit back once you’ve made several months’ worth of payments – typically ranging from three to 12 months.
Choose a SIM-only tariff. If you’re willing to buy a handset upfront, or already have an old phone you can use, you could opt for a pay monthly SIM-only deal. These are cheaper than full-blown contracts as you’re not receiving and paying for a phone as part of the deal.
You will still have a credit check, but you’ve got a greater chance of being accepted as payments are typically lower for these contracts, so there’s less risk for the provider.
Also, paying your monthly SIM-only bill on time will help show that you can sensibly manage a contract, which may boost your credit score over time.
Opt for a pay-as-you-go deal. If you want a phone for occasional use, then a pay-as-you-go deal might suit. Once you’ve bought a phone upfront, you pay for credit as and when needed. You won’t be tied into a contract, and will not be subject to a credit check.
Get a ‘bad credit’ contract. There are specialist companies which supply phone contracts to people with bad credit. You can do an online search to get an idea of what’s available, or speak to an adviser in a mobile phone store.
However, you may not be able to get the phone model you want, and your monthly payments may be substantially higher than for a standard contract. This is not an option to be taken lightly.
Check out family deals. You may want to ask a family member with a good credit rating to sign up to the contract. That’s if you’re opting for a family deal, when several lines may be connected to a single contract – but only one person pays the bill and undergoes a credit check.
Get a guarantor. Alternatively, you could ask someone to essentially guarantee your contract by co-signing it. But, of course, they must be comfortable being liable for any missed payments, thereby offsetting the risk for the network provider in case you default. Provided you make payments on time, this option can also gradually improve your credit rating.
Improve your credit score. To improve your chances of being accepted for a mobile phone contract or any other form of credit in the future, you can take time to improve your credit score by, for example:
- Registering on the electoral roll with your local authority
- Ensuring you don’t fall behind with monthly repayments on any bills (set up direct debits to pay them automatically)
- Sticking within your credit limit on any cards that you use and clearing the balances every month
- Check your credit report (see above) and if you find any errors, ask the agency to amend them with a ‘Notice of Correction’
Upstart vs. Sofi: Which Personal Loan Is Right for You?
Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders, all opinions are our own.
If you’re looking for a personal loan, you’ll likely come across Upstart and SoFi. Both companies offer flexible loans for a variety of purposes, but there are some differences to keep in mind when deciding between them.
Here’s a comparison of Upstart vs. SoFi to help you choose. Both Upstart and SoFi are Credible partners.
|Fixed rates||8.13% – 35.99% APR4||5.99% – 18.83% APR|
|Loan amount||$1,000 to $50,0005||$5,000 to $100,000|
|Loan terms||3 to 5 years4||2 to 7 years|
|Min. credit score||600
(in most states)
|Does not disclose|
|Time to fund||As soon as 1 – 3 business days6||3 business days|
|Origination fee||0% to 8% of loan amount||None|
|Income||$12,000||Check with lender|
|Residency||Available in all states except IA and WV||Available in all states except MS|
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Upstart personal loans
Founded by ex-Googlers, Upstart’s artificial intelligence platform fully automates 58% of its personal loans. It has originated $6.9 billion in loans and notably offers loans to those with less-than-perfect credit.
Upstart offers personal loans for a variety of uses — including debt consolidation loans, wedding loans, and more. You can borrow as little as $1,000 or as much as $50,000 and can expect fast loan funding.
Learn More: Personal Loan vs. Credit Card
- Lower minimum credit score: Upstart offers personal loans to borrowers with credit scores as low as 600. If you’re looking for bad credit personal loans or fair credit personal loans, Upstart could be a good choice.
- No prepayment penalties: You don’t have to worry about any fees if you pay off your loan early.
- Fast funding: If your application is accepted, you’ll likely get your money within just a few business days. In fact, Upstart says that 99% of applicants get their money after just one business day.
- Low minimum borrowing amount: You can borrow as little as $1,000 with Upstart, which could be helpful if you only need a small loan.
- Lower maximum loan amount: With Upstart, you can only borrow up to $50,000. This could make it harder to fund larger debt consolidations or bigger home improvements.
- High origination fees: With Upstart, you might pay an origination fee of up to 8% of the loan amount.
- No options for visa holders: Upstart doesn’t offer personal loans for visa holders — you must have a Social Security number to borrow with this lender.
Check out our Upstart personal loans review to learn more.
SoFi personal loans
SoFi offers a variety of financial products, including credit card consolidation loans and other types of personal loans. It also provides several perks to its members, such as unemployment protection, career coaching, and networking events.
With SoFi, you can borrow anywhere from $5,000 to $100,000. Plus, SoFi personal loans come with no fees.
Learn More: How Personal Loans Impact Your Credit Score
- Large loan amounts: You can borrow up to $100,000 in unsecured funds with SoFi. This can be useful for home improvement loans, wedding loans, and other large borrowing needs.
- Discounts available: If you sign up for autopay, you can get a discount on your SoFi personal loan. You might also qualify for a discount if you’re using other SoFi products.
- Member benefits and perks: As a SoFi member, you’ll have access to additional resources, including financial planning, career coaching, and networking events. SoFi also provides unemployment protection in case you lose your job.
- Options for visa holders: If you’re a visa holder without a Social Security number, you might still qualify for a SoFi personal loan.
- Higher credit score requirements: You’ll need good to excellent credit to qualify for a personal loan through SoFi. If you have poor or fair credit, you’ll likely need to consider other lenders.
- Higher minimum loan requirement: You’ll need to take out at least a $5,000 personal loan to borrow through SoFi. If you need a smaller loan, SoFi might not be the right choice for you.
- Longer funding time: SoFi personal loans typically take a few business days to fund. If you need a faster loan funding time, you might need to look elsewhere.
See our SoFi personal loans review for more details.
Choosing a lender for a personal loan
A personal loan could help you cover large or unexpected purchases. Before you borrow, it’s a good idea to shop around and consider as many lenders as possible to find a loan that fits your needs. Credible makes this easy — you can compare multiple lenders, like Upstart and SoFi, in two minutes.
Keep Reading: Where to Get a $10,000 Personal Loan
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