All The Things That You Need To Know About Factoring Invoices
Factoring invoices is actually a common business practice and it is done by businesses that have a long invoicing cycle or have difficulty collecting from their clients. If you are a business that waits 30 days for payments to come in, then you definitely will benefit from the invoice financing packages being offered by the different factoring companies out there.
How does it work? It works this way: You apply for invoice financing from the factoring company. The factoring company looks at your invoices and gives you cash, which is typically equivalent to 70% to 90% of the total invoice amount. The company then waits for the invoice to be paid (they will collect it). You will be given a rebate equivalent to the remaining 30% to 10% minus the factoring fee.
There are many companies out there that offer invoice financing. But just like anything else, not all of them are created like. What you want to do is to look for a company that has the combination of the following factors: transparency, fair terms, and confidentiality.
Transparency means that the factoring company tells you everything you need to know when you enter into an agreement with them. This includes information on the fees that you will be paying, the terms of the agreement (whether it’s on an as-needed basis or on a contract basis), and penalties.
For your own sake, you do not want to be trapped in a long-term contract with factoring companies. Why? Because chances are your circumstances will change and you might see cash flow become liquid, much more liquid than it ever was, and you will not have a need for an invoice financing anymore. But there is one other reason for avoiding contracts: If you terminate your contract prior to expiry, you could pay hefty fines.
As for their terms, you do not want to work with a company that takes over all of your invoices. As a matter of fact, there are companies like that. What you want to do is to find a company that gives you the option for “spot factoring” aka single invoice factor. Under this agreement, you can choose the invoices that you want to be financed.
Another important thing that you need to consider when choosing a factoring company is confidentiality. There are many out there who work on a notification basis, which means that they inform your client that their invoices have been assumed. You do not want this to happen because it will affect your relationship with your clients. This is especially true if you are a business-to-business company, and you are dealing with corporate or government clients.
The factoring invoices company that gives you the highest cash up front is not necessarily the best one. We can’t emphasize this enough, but you need to look at the terms of the factoring company before you sign up for any invoice financing agreement that will free up your cash flow.