Invoice factoring, also known as accounts receivables factoring and invoice financing, has emerged as an increasingly popular solution for small and medium-sized businesses struggling with payment delays by B2B clients. An factoring service takes over or buys your unpaid invoices and gives you an instant cash advance so that you can continue to run your business without waiting for clients to pay up.
Sufficient working capital is crucial for the survival of a business, particularly when it is in the starting phases and is wildly dependent on incoming payments to continue functioning. Invoice factoring allows you to get past the usual 30/60/90 days payment cycle with B2B customers by charging a small fee for the service.
If you’re new to invoice financing, here are 3 key considerations that will help you choose a receivables factoring company, or factor, that’s a good fit for your industry niche.
Cash advance rate
Any business that looks for invoice factoring is clearly looking for a source of instant working capital. Unlike conventional factoring agencies, modern-day factors ensure that the approval process is swift and simple and will offer you up to 90% of the invoice face value within as little as 24 hours.
Before signing up with a factoring service, understand the company’s approval system and payment process. Find out the advance they will pay you upfront and the terms governing the release of the remaining amount. Also find out if they have the experience to serve organizations of your industry, size and scale.
Factoring fees and other charges
What is the factoring fee you’ll have to pay to use the service? If your client does not clear the invoice by due date, will the factoring agency penalize you for the same?
Ask questions and don’t get lured by incredibly low fees offered by some invoice financing companies. There could be hidden fees and charges that will show up only when you’ve used the service, so make sure to get in writing the factoring charges and any additional fees that you can expect to be billed later.
Terms and conditions of the agreement
Does the factoring company offer customers the option of going discreet, that is, an arrangement where your B2B client won’t know that you’re using a factoring service? Is this important to you?
What is the recourse if your client does not clear the invoice and the factor does not receive any money? Will they penalize you for bad debts? What is the refund policy if you have to pay back the cash advance? What are the legal and financial implications on your business in such a situation?
Ask these questions—and more—before selling your accounts receivables to a third party.
To conclude, while there are several factoring companies out there vying for your business, take the time to do your research and pick a company that has the expertise to offer you a great factoring experience for a fee you can afford and on terms that are in your best interests.