If you are among the commercial finance brokers not offering invoice factoring and PO financing, then you may not have been maximizing your commissions, and your clients may not have benefited from the best alternative funding solutions for small and medium-sized businesses.
Invoice factoring and PO financing have provided businesses with vertically integrated funding for decades. For finance brokers, these financial products can significantly enhance your income and provide a recurring stream of commission income. For your clients, invoice factoring and PO financing, when combined, provide funding solutions that are fast, flexible and easier to obtain than traditional asset-based business loans. Nor do they expose them to the risk of becoming entrapped in a cycle of debt with short-term high-interest lenders and costly MCAs.
Invoice Factoring and PO Financing
With invoice factoring, small and medium-sized companies don’t need to wait 60+ days to be paid. They can convert their unpaid accounts receivable – a single invoice or all invoices continuously – into immediate cash and ongoing working capital, which can then be used to pay employees, operating expenses, and purchase materials and inventory. Unlike traditional loans, invoice factoring is not a debt. It is a fast and flexible way for businesses to accelerate their cash flow.
Purchase Order (PO) financing is commonly used in conjunction with invoice factoring. It bridges the gap between receiving an order and fulfilling it. PO financing provides funds to purchase presold finished goods and presold inventory for specific orders that a business may not be able to fund otherwise. This allows businesses to also fulfill larger orders without straining cash flow. PO financing and invoice factoring make it possible to fund the entire transaction cycle with one reliable funding source.
Building a Recurring Stream of Commission Income
Many commercial finance brokers and ISOs tend to focus on traditional business loans, lines of credit, or merchant cash advances (MCAs). However, invoice factoring and PO financing are often overlooked. There are several reasons why adding invoice factoring and PO financing to your financial product offerings makes it possible to build a recurring stream of commission income, including:
- High Commissions: Invoice factoring and PO financing can offer some of the highest commissions in the commercial finance industry. As a broker, you have the ability to earn ongoing referral commissions every time your client receives funding. With invoice factoring and PO financing, you earn commissions on the entire transaction cycle – the purchase of presold finished goods and presold inventory and then also on the factoring side.
- Recurring Income: Commissions on loans and lines of credit are generally paid just once when the facility is funded. Commissions on invoice factoring and PO financing continue to be paid for as long as the relationship between your client and the factor company lasts.
- A Passive Annuity: Once a client has been approved and the client begins to submit invoices for factoring, nothing more is required of the financial broker. This means you earn commissions, but you are free to pursue other business opportunities. The passive income becomes an annuity and is far more valuable in the long run. Also, the costs of being a financial broker or operating an ISO are front-end loaded, i.e., prospecting for new clients and closing new funding facilities. With invoice factoring and PO financing, you need to close fewer funding transactions to generate enough commission income to cover your costs as your recurring (annuity) commission income grows.
- Long-Term Relationships: These transactions tend to be very profitable for financial brokers and ISOs, and they strengthen relationships with clients, build trust, and lead to referral business. As your client’s invoice factoring and PO financing volume grows, so do the commissions. Invoice factoring and PO financing in many cases can be an ongoing relationship that lasts for years. This means consistent commissions over an extended period.
Importance of Working with an Experienced and Reliable Factor Company
Successful commercial finance brokers and ISOs that offer invoice factoring and PO financing know how important it is to work with an experienced and reliable factor company. They work with factor companies that customize invoice factoring programs to provide the working capital funding their clients need to operate and grow their businesses.
They affiliate with factoring companies that consistently deliver much-needed funding to their clients and offer professional advice on subjects that are critical to their success, such as how to navigate the challenges of the current regulatory and legal landscape. For example:
- Some states are adopting commercial financial disclosure requirements that make it increasingly difficult for commercial funding providers to comply with the regulations. These regulations may restrict some funding options for prospective clients. By including invoice factoring and PO financing in your offerings, you can ensure enough business funding options are available. Also, finance brokers are not responsible for the content of disclosures, however they are responsible for relaying the disclosures from the provider to the client, obtaining signatures, and delivering signed disclosures back to the provider. Brokers and ISOs need to stay up to date on CFDRs to be in compliance. Working with a knowledgeable financial service provider can help you understand the requirements so you may continue to grow your book of business.
- Increased regulation of traditional lenders such as banks has reduced their appetite for loans classified as moderately risk with the result that many small business owners are not able to fund their businesses with capital from conventional lenders.
- Financial brokers will have fewer options to place deals with conventional funding sources, potentially restricting their ability to earn commissions.
Commercial finance brokers need to consult legal experts, industry associations, and other experts unless they work with a factor that can provide guidance through the myriad of ever changing regulations and compliance requirements.
How to Get Started Offering Factoring and PO Financing
Getting started with factoring through Capstone is a simple and easy process similar to initiating any deal. If you refer business loans, credit lines, MCAs, or equipment financing, you may already have prospective clients who need invoice factoring and PO financing.
Begin by identifying a business prospect and initiate contact with the prospect. Next, qualify the prospect and begin the process of applying for a factoring facility. Then help to guide your client through due diligence, the term sheet or proposal, and a seamless transfer to a closing.
Capstone can help you get started with invoice factoring and PO financing through its vertically integrated platform. Once you get started with Capstone, you build a recurring stream of commission income. We have the resources to help commercial finance brokers, and ISOs become successful and navigate the challenges of the current regulatory environment. For more information please contact a Capstone representative.
