Invoice factoring is a valuable tool for small businesses. Let’s say for example, when you sell or distribute products, each of your manufacturers probably has a different day or part of the month when they pay invoices. If you don’t have a large amount of liquid cash to cover the regular costs of running your business, the pending payments from your clients can leave your company high and dry. If there’s a season when it’s slower for your business, each of your unpaid invoices counts and having another company collect on them can be really useful. When you use factoring, a factoring company gives you a cash advance for your unpaid invoices with a small fee. We can help you determine how to avoid choosing the wrong factoring company or dealing with them incorrectly.
Understanding Your Agreements
Each factoring company has its own set of fees and rules. If you choose a company to give you cash for your unpaid invoices without reading the fine print, you could end up paying a lot more than is fair. Most factoring companies offer rates from 1-5%. Your company’s revenue and credit can impact the rate that you are approved for.
Some shady factoring companies add on a lot of additional fees. These fees put a dent in the amount of money that you end up getting for your services to your clients, which is hardly fair, so make sure that you shop around for a reputable invoice factoring company before making a final decision.
When you have a factor, you don’t normally accept payments for the unpaid invoices that they’ve already purchased from you. Accepting payments directly bypasses the factors collection process and can put you behind with your factor and cause a lot of confusion. Make sure that you immediately forward to your factor and payments you receive on purchased invoices and also provide your clients with the correct payment information to keep this from happening to your business.
Not Choosing the Right Option for Your Business
Make sure that you choose the right option for your small business. Factoring may require monthly minimums for purchasing invoices. Factoring usually works more effectively if a business has a larger revenue stream. For a small business just starting out, factoring works best for high-growth situations, but might not be the best financial option. If you have a seasonal slowdown for your business, using factoring at this time can keep your cash flowing, which could prevent you from having to close or make cuts.