INTRODUCTION TO INVOICE FACTORING
Invoice factoring is selling your invoices (accounts receivables) to a third party or a factoring company to reduce debt and improve cash flow. Businesses that use invoice factoring see an immediate boost in cash flow. Independent finance providers or banks provide invoice factoring
Invoice factoring services provide a solution to cash flow problems. It provides short term capital by assigning and selling invoices to a factoring company or factor. The factoring companies usually give 70-90% of the invoice value in advance. Invoice factoring is an excellent option for businesses and companies that need access to cash quickly but are not able to secure a traditional bank loan.
There are several types of invoice factoring. In recourse factoring, the business or the company is liable to pay back and is responsible for any risks.
In non-recourse factoring, the factor or the factoring company is liable and responsible for unpaid invoices.
Another type of factoring is undisclosed or confidential factoring. The customer does not know about a third party or factoring arrangement.
Some other types of invoice factoring are advance factoring, maturing factoring, bank participation factoring, full factoring, domestic and cross-border factoring, suppliers guarantee factoring, etc. You need to have proper knowledge about which factoring would benefit your business.
7 TIPS TO CHOOSE THE BEST INVOICE FACTORING PARTNER
We will discuss some important tips for choosing the right factoring partner. Some of them are as follows:
WHAT IS THE REPUTATION AND EXPERIENCE OF THE FACTORING PARTNER YOU CHOOSE?
A factoring company will directly follow up with your clients to check on the payment status, in the process of financing invoices. You must ask your factoring partner for references from their existing clients. You should also enquire on the internet about the factoring company to check the status and reputation of the company.
The best factoring companies usually have been in business for more than a decade. This means that they have good experience to manage accounts under economic circumstances and problems. You cannot be best at something if you are new at it.
HOW IS THE CUSTOMER SERVICE OF THE FACTORING PARTNER YOU CHOOSE?
The factoring partner that you choose must have a strong customer service. It is very important. Customer service is vital to you as a company owner. The factoring company should be efficient and fast. Customer service is not only important to you but also for your customers.
The factoring company gets in touch with your customers, so you must find a factoring company that is well mannered and treats your clients with great respect. You must ask for company referrals and check client reviews to determine whether the factoring company has good customer service.
DO YOU UNDERSTAND THE FEE STRUCTURE OF THE FACTORING PARTNER YOU CHOOSE?
The fee structure for factoring companies ranges is either flat or variable. The lower your rate will be if you factor your invoices more. Variable fee structure or tiered fee structure, for as long as the invoice is outstanding, the factors will discount a small part of the invoice. This means for as long as your invoices go unpaid, the more fees you will gather over time.
Variable fees are complex to calculate, but they are more cost-effective depending on your business.
Once you know about the fee structure, you must find out how will you monitor or track them? Will you get a statement? Can you immediately and easily check the information online?
WHAT ARE THE TERMS OF THE FACTORING PARTNER YOU CHOOSE?
There are some important terms and options that you should know about. There is spot factoring that lets you factor a single invoice for one time without any long term agreement. The fees are generally higher in spot factoring.
One option is whole ledger factoring, where you need to submit all your invoices and you need to sign a contract. In recourse factoring, the business or the company is liable to pay back and is responsible for any risks. In non-recourse factoring, the factor or the factoring company is liable and responsible for unpaid invoices.
WHAT ALL INDUSTRIES DO YOUR FACTORING PARTNER WORK WITH?
Many factoring partners state that they are comfortable working with any industry. But the best factoring companies usually specialize in one industry. Your business will grow best if you work with a factoring company that knows your industry properly.
To know if they are aware of your industry, you must question the factoring company and see if the company is knowledgeable. You must also ask for customer references from the factoring company.
DOES THE FACTORING PARTNER YOU CHOOSE HAVE MINIMUMS?
Some factoring companies offer plans with minimums, while other factoring companies offer plans with no minimums. A factoring minimum is an amount that you require to factor for a given period time. This could be a month, a quarter, or a year.
You need to pay the difference if you factor less than the minimum charged by your factoring company. You can also use minimums as a negotiation to receive lower rates.
HOW FLEXIBLE IS THE FACTORING PARTNER YOU CHOOSE?
Make sure that you choose a flexible factoring partner. Some factoring companies require payment penalties or monthly minimums, and long-term agreements. You must choose a factoring company that lets you select which invoices you want to factor and when. You should avoid terms and conditions in which you have to factor all invoices from a particular client.
Some factoring companies take over your accounts receivable and become responsible for sending invoices and collecting payments. Many small business owners and operators prefer to have ownership over their client relationships and send their invoices by themselves.
Choosing the right factoring partner can be tricky and complicated. But you need to be sure which factoring company will be helpful for your business. So, it becomes important to check and know everything about the factoring company you select.
So, it becomes important to check and know everything about the factoring partner you select. These tips are very vital for your business when you choose a factoring company. Look for a factoring company that gives you and your business flexibility, features, and terms that you require.