Waiting for payments becomes very frustrating for any business operators and owners. Sometimes the wait is between 30 to 90 days before receiving payment. This waiting and hauls can lead to major cash flow problems, which will directly affect the business and the company’s growth.
Cash flow issues cause business owners to pass an important business opportunity, or fall behind on expenses like payroll or inventory, or expand business to a new area.
WHAT IS INVOICE FACTORING?
Invoice factoring is a solution for your cash flow problems. It is a kind of financing that helps small and medium-sized businesses to get cash in advance on their accounts receivables.
Small and medium-sized businesses get paid easily and quicker instead of waiting for weeks to get their payments on invoices and claims. It lets them use the money they already have to run and grow their business efficiently.
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.
HOW TO CHOOSE THE BEST FACTORING COMPANY FOR YOUR BUSINESS?
For small businesses to operate properly and deal with the issue of cash flow gaps, getting working capital is important. But it is equally important to have information and know-how to choose a factoring company to make a proper decision.
To help you understand better which and how to choose a factoring company, we will be discussing some important questions to ask when you look for the best invoice factoring company for your business.
WHAT KINDS OF SERVICES DO THEY OFFER?
When you choose a factoring company, you must always consider the kind of services you require for your business. Do you want all of your invoices factored, or do you want to be able to select which invoices you want to factor and if you are ready to take on any risk if a client is not able to pay for an invoice?
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 RATES AND TERMS DO THEY OFFER?
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.
With a flat fee structure, the rates usually stay the same throughout. The fees for flat rates are higher than the variable fee rates. Flat fee structures are most commonly used by businesses in the transportation department.
Factoring rates and terms are based on many factors like quality of clients, business industry, kind of service, the volume of invoices, and net terms of the invoices.
WHAT INDUSTRIES DO FACTORING COMPANIES WORK WITH?
The great candidates for accounts receivable factoring are B2B businesses with reputable clients and longer net terms. The industries that use factoring are transportation, consulting, staffing services, retail, manufacturing, oil and gas service companies, construction, commercial services, distribution, IT services and software development, freelancers in the field of marketing, PR and creative, etc.
ARE THERE ANY HIDDEN FEES OR COSTS?
Some invoice factoring companies have hidden costs and penalties. You must know what causes these penalties so that you can avoid them. There is a termination fee, which you need to give if you are in a long-term agreement and want to cancel it. Some factoring companies need businesses to commit to factoring a specific amount of invoices every month.
There is also a maintenance fee, this is charged to keep your account current and active with the factoring company and are charged on a monthly basis. Due diligence fee is charged when the factor requires checking the background of the customer. The factor makes sure that your customer has good credit and unpaid taxes and does not have any liens.
WHAT IS IN THE FACTORING CONTRACT?
The invoice factoring contract is a financial agreement that provides the terms and costs of your factoring plan. It includes complicated provisions and terms, so it is important to understand and study a contract before you sign it. Some factoring agreements force high cancellation fees.
WHAT IS THE ADVANCE RATE OF THE FACTOR?
You receive an advance rate upfront; it is the percent of the invoice value. A good advance rate is between 70% to 90% of the face value of the invoice or claim. For instance, you will get an advance payment of $700 to $900 if your client owes you $1000.
HOW FAST CAN YOU RECEIVE FUNDS?
Some factoring companies can take months to set up, and some can set up in less than 10 days. Once you have an account that is set up, you can get your funds in hours. After an invoice is submitted, most factors can deposit funds in your account within hours.
These questions are very important for your business if you choose invoice factoring services. Look for a factoring company that gives you and your business flexibility, features, and terms that you require.