Continuous working capital can be one of the biggest frustrations for companies, especially those with seasonal operations or lumpy cash flow along with long payment periods. Invoice factoring is a financial solution that can help turn your good invoices into working capital that you can use to manage your daily activities and expand your operations and business. Therefore, selecting the right factoring company is one of the most important decisions that you will have to take when seeking this type of funding as you will be working closely with your factor for a while and your success and achievements will depend on that relationship.
However, finding the best factoring company is no simple task. Hundreds of invoice factoring companies that range in both size and expertise exist on the market. While some would serve various industries, others would once focus on a segment. Also, fee structures, contract terms and available programs would differ from one factoring company to another.
This article explains much you need to know for you to choose the best factoring company for your business.
What is Invoice Factoring?
For your business to make the right choice, it is crucial for you to understand the invoice factoring concept and how it works. Invoice factoring, also referred to as accounts receivable factoring or AR factoring, is a financial transaction involving a business to sell its accounts receivable to a factoring company to secure a working capital to cover its expenses.
When your business delivers the goods or services to your customers, you issue invoices. These invoices are usually due in 30, 60 or 90 days meaning that you will have to wait for a delayed payment while having immediate needs. Therefore, you can choose to factor some of all your invoices to a factoring company that will buy them and bridge that gap for you.
There are usually three parties involved in a receivable financing transaction: the company that issued the invoice, the account debtor (customer owing the payment), and the factoring company. This way, invoice factoring allows your business to have a steady cash flow and enough working capital to manage your operations and support your growth.
What are the different types of Invoice Factoring?
It is the most common type of factoring services. You, as an owner, assume the risk if your customers fail to pay your factor. The rates of recourse factoring are the most competitive.
The factoring company assumes the risk in case of non-payment meaning that you are not liable to repay the factor if your customers fail to pay. The fees can be higher as the factor is taking a bigger risk. However, Businesscash utilizes credit insurance at very competitive rates and passes this on to you as credit protection.
Your business can factor a single invoice on a one-time basis. The most expensive type of factoring as the risk is concentrated into one single invoice.
What are the benefits of Invoice Factoring?
Invoice factoring will allow your business to easily manage its cash inflow and daily activities as well as take advantage of growth opportunities.
In summation, the benefits of invoice factoring include:
- Fast access to cash;
- Flexible negotiable terms;
- Reasonable service fees;
- Professional receivable management and industry experience;
- Based on your clients’ creditworthiness, not your own credit line;
- Provides free back-office support;
- Factoring is not a loan, meaningless debt on your balance sheet;
- Funding grows as your receivables grow.
What are the major keys to consider when choosing a factoring company?
Choosing the right funding partner is vital to the success of your business. With so many available options, it might be hard to decide which one is the most suitable for you. The following factors will help you have a better understanding of the major keys to take into consideration when choosing a factoring company to work with:
Reading the fine print of your proposal is important. You must pay careful attention not only to the advance and factoring fees but also to the reserve conditions and additional costs such the processing fees and the application fees. To decide, you must compare your proposal. The lowest factoring rates don’t necessarily mean the cheapest option as the additional charges can make a huge difference.
An advance rate is the percentage of the invoice worth that your factor provides you with an upfront payment. Some factors can only provide you with 60-70% whereas Businesscash can give you up to 90%.
Support through telephone, emails and potential meetings is a must. You need to choose a factor who will see you as a partner and treat your customers in a way that reflect best your business, culture, and ethics.
In life, there is only one thing worse than no sales and that if you sell your product and never get paid. Unless you have a sophisticated credit manager in place, non-recourse factoring is your only wise business choice. Businesscash has been a non-recourse factor for 20+ years.
You need a factor who is flexible to work with. Your factoring company must be suitable for your needs. For example, at Businesscash you don’t have to factor all your invoices. Always look for a factor that can provide you with the program that will serve your best interests not the other way around.
Strong Balance Sheet:
There are horror stories about how weak factoring companies go out of business and leave their clients in precarious situations. Make sure your choice in factoring companies has the strong financials and a long track record to always be there for you.
It is crucial for you to find a factoring company that has direct experience in your industry. Some industries are more delicate than others and may require adjustable programs and services. Along with the industry experience, you should choose a factoring company that is well-established and has a proven track success record.
Additional Factoring Services:
You should consider if the factoring company include additional factoring services that can help you grow your business. A factor that also offers PO funding is a huge plus for a wholesaler or importer. Also taking into consideration their account management and back-office services can help you narrow down your options. In fact, a dependable factor will provide you with up-to-date information about your account and invoice payment collection. Offering high-tech reporting capabilities and 24/7 access to information using online platform is a considerable plus.
This factor is hard to quantify, yet, extremely vital. You want to deal with a factor who keeps his promises, fairly treats your customers, and doesn’t surprise you with hidden factoring fees. You can request your factor to provide you with bank references, client references and a summary of their financial status. You need your factoring company to have a reliable credit history and a list of long-term clients. Remember, your factor will be your working partner, so a demonstrated track record of professionalism is crucial.
Choosing a factoring company should be done carefully. You need a factor that can offer you more than just financing. To choose your factoring company, consider how each of these key factors are vital for your business.
You need to pick a business partner that will offer your business the most optimal combination of criteria, flexibility and terms that are suitable for your needs.