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 for small businesses helps the company to grow and develop.
Invoice factoring services are 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.
TOP 7 TIPS FOR CHOOSING THE RIGHT FACTORING COMPANY FOR YOUR BUSINESS
You should carefully choose a factoring company. The terms and conditions can vary depending on your company and industry. Here are 7 important tips you should consider while you choose a factoring service and company.
INDUSTRY SPECIFIC FACTORING COMPANIES
Many factoring companies state that they are comfortable working with any industry. But the best factoring companies usually specialize in one industry. You should know if you require a specific industry factoring company. Factoring companies provide their services to a large range of industries and some industries need specialization.
Transportation, construction factoring and medical factoring are some of these specialized industries that need invoice factoring services for their businesses.
RECOURSE AND NON-RECOURSE FACTORING
One important tip is to know if the factoring company offers recourse and non-recourse 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.
Given that there is a higher risk, only 20% of the factoring companies provide non-recourse funding and those companies who offer this type of factoring generally charge high fees.
RATE AND FEE STRUCTURE
The fee structure for the factoring company range 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
FLEXIBILE FACTORING COMPANY
Make sure that you choose a factoring company that is flexible. 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.
Have they been in business long enough? This is one of the most important tips that you must ask the factoring 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.
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.
STRONG CUSTOMER SERVICE
The factoring company 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.
It can be very tricky and complicated when you choose a factoring service, but it is more difficult to select the right factoring company for it. 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. 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.