Cash flow is one of the most important things for a business. Just as in life, a business can’t make it without money. Having cash on hand helps pay for outstanding bills and ensures you can pay your team and yourself, reinvest in your business, or expand operations when necessary.
It also helps to have money in the bank in case there are slow periods or other unforeseen events. Cash flow is a must, but often difficult to achieve if clients are not paying their invoices in a timely manner.
Factoring has emerged as an alternative for businesses to handle any cash flow issues and to turn invoices into a money machine. Think of factoring as a method of financing that offers short-term access to money rather than opting to take out a business loan or use credit cards as a float.
Businesses can sell their invoices to a third party known as the “factor.”
The funds are made available until the customer pays the outstanding invoice. Typically, you get paid between 70 and 90 percent of the total invoice value as quickly as within one business day. When the customer pays, the factoring company forwards you the remainder, plus their service fee.
Of course, you need to be creditworthy for a factoring company to consider doing business with you. However, it can be just the injection of cash you need to keep fueling your small business until your customers catch up with their invoices.
Once you determine that factoring might be a logical means of increasing cash flow in your business, it’s then time to determine what to look for in a factoring partner.
Here are five research tips that you can use to determine what factoring company might provide you with the assistance you need to leverage the real benefits of this service:
Look at rates, fees, and penalties:
Like credit card processing companies, many factoring companies can advertise low rates, which seem too good to be true. Be wary, these companies could be hiding fees that suddenly appear later on. For example, they could start charging you for two months when the invoice was actually paid in one month and two days. That’s not really two months obviously, but the way that company does their fees, it is and they haven’t necessarily been transparent about it.
The same goes with rates and penalties. If you know what to look for and what sets these fees in motion, then you will realize what types of issues to avoid. That’s why it is up to you to dig deeper and bring those fees to light in your research. Don’t skip this step.
Avoid contracts, or review it with a microscope:
There may be times where you can’t avoid signing a contract with a factoring company. However, you can spend time researching what should be included in the contract, what you can negotiate, and what you can eliminate to protect yourself and keep costs down. There’s no reason you need to get locked into a long-term contract with a factoring company because, at some point, factoring may no longer be something that you need to lean on for cash flow purposes. Make sure you read the contract carefully to avoid minimums and any unforeseen fees.
Aim for non-notification factoring:
There are certain factoring companies that actually let your customers know that you are selling your invoices and also request that the funds be put in an account that has your factoring partner’s name on it. For many reasons, you most likely want to stay away from this type of communication and look for a factoring company that provides complete confidentiality about what you are doing, so you can control what you share with customers.
Weigh the types of factoring available:
You will need to determine what type of factoring works best for you. For example, whole ledge factoring means you have to submit all invoices from a particular customer. In contrast, spot factoring (also known as single invoicing discounting) gives you more control because you can decide which invoices you want to request an advance on from the factoring company. Just remember that this flexibility can also comes with a higher cost.
Check for online reviews:
It is always helpful to hear what other companies have to say about their experiences with factoring companies as well as look into review sites that gather some of the research for you. This way, you can do some comparisons on the various criteria that are important while also assessing what these factoring companies have done for others. Some sites include Consumer Affairs and the Invoice Factoring Forum.
This research will help you identify a factoring company that meets your requirements for terms, flexibility, costs, transparency and commitment. Once you know what type of factoring you need, how many invoices you handle each month, and what fits your budget, you will have a better idea of what type of factoring company is right for you.
Along with other accounts receivable best practices, factoring may provide you with a great alternative way to keep the cash flowing.
This blog comes as a guest post from John Rampton, CEO of Due.com. John Rampton is an entrepreneur, investor, online marketing guru, and startup enthusiast. He is the founder of the online payments company Due. Follow John on Twitter at @johnrampton.
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