Receivable factoring is an effective way to relieve cash flow tensions especially when your business suffers from a lack of operating funds. At some point, a business may decide to sell some accounts receivable, meaning outstanding bills that your clients owe, to a factoring agency at a discounted rate to receive immediate cash flow. In this process, it is understood that the company would need to pay back the debt if the factoring company cannot collect the payments outstanding.
There are many factoring companies to choose from, therefore it is always important to figure out what to consider in order to realize the appropriate match for your business. Below are the 4 important things you should consider when factoring receivables.
1. Ability to provide information needed
A reliable business will frequently ask a number of questions to all factoring candidates. These questions usually touch on specific length of time the factoring relationship will last, amount to be sold based on invoices, factoring invoices to prospective customers, minimum amount of invoices required for factorization, and penalties involved in case those minimum requirements are not met.
A factoring company may require a company to sign a personal guarantee to hold clients responsible for unpaid invoices. It is always vital to provide correct information to factoring companies to ensure you get the assistance you need. Some of the information required may seem onerous but the fact that the factoring company is requesting this from you demonstrates due diligence and that they are competent and trustworthy.
2. Choose a recognized and experienced factoring company
For the most part, business owners should consider securing funds from a recognized factoring company. It is always important to do business with a factoring company that has a good track record as well as consistent customer satisfaction. If you are unfamiliar with the factoring receivables process, you should consider choosing a factoring company that is an International Factoring Association (IFA) member.
Factoring firms that have registered with IFA abide by a strict policy of business ethics and practices, guaranteeing that you are dealing with a company who will provide you with the service you require without worrying about deception or any illegal activity.
3. Industry expertise
There are many invoice financing companies prepared to assist firms of all sizes in all industries. Finding a firm that takes time to familiarize itself with your business and the industry it is in is an important step to take. Partnering with factoring receivables firms that understand the features and business operations of your organization will ensure that factoring activity runs smoothly and that future processes will be successful if required.
You should not have to continuously explain your business to a factoring firm that is not fully aware of your business model. Choosing a factoring company who is already familiar with your industry will save you time, put you well on your way to increasing the case flow required, and allow you to put more emphasis on components that will grow your business.
When a factoring company sets a price to pay for receivables, it is trying to make a legal purchase of all accounts at a discount rate. However, discount fees may be affected by some factors such as the contractual commitment, average amount of the sold invoices, and the total sum of the accounts that will be factored. These variables will usually impact the cost of the factoring receivables process.
There are several other potential fees that a factoring company may add such as credit costs, administrative fees, and penalties for non-payment. Determining what costs you could incur is beneficial before entering into a business agreement with a factoring company.