Picking the Right Fit for a Factoring Company
As a business owner, you know you need to get paid if you want to keep your operation running smoothly. However, if you rely on clients to pay their invoices, you may find you aren’t making money as quickly as you need. Luckily, you don’t need to wait for long payment cycles to get working capital. Instead, you can find a factoring company to sell your invoices to.
Selling Your Invoices
Selling your invoices is sometimes known as accounts receivable financing or factoring. The process involves selling your outstanding invoices to a lender for a percentage of their amount. Typically, you’ll receive 70-90% of the value up front. When the client pays the invoice, you’ll then receive the remaining percentage, less a seller’s fee. As an example, imagine you sell a $1,000 invoice. If you receive 70% right away, you’ll get $700. When your client pays the $1,000, your seller will give you the remaining $300, less a fee for the services.
Advantages and Disadvantages of the Process
As with any type of financing, there are advantages and disadvantages to selling your invoices. On the plus side, selling them allows you to get working capital fast, which is especially helpful if you come across an emergency and need funding fast. Selling invoices is also more flexible, allows for longer repayment terms, and doesn’t focus on your personal or company credit history. Instead, it focuses on your clients’ creditworthiness.
Of course, this can be a disadvantage as well. If your clients have a history of paying late or not at all, it is likely to make it more difficult to sell their invoices. There are other downsides, as well. Selling your invoices may not be an option if you don’t have notable, large clients, and the fees can be more expensive than if you were to qualify for traditional financing. Finally, if a client doesn’t pay his or her invoice, you could be on the hook for it.
Choosing the Right Lender
When it comes to finding the right lender, you should ask yourself a few questions. First, do they offer the type of factoring services you need? Some companies will allow you to choose which ones to sell, while others expect you to sell all of them (these are known as a spot or whole ledger methods). You’ll also need to determine whether the company uses recourse or non-recourse methods, which means the difference between you being on the hook for an unpaid client or not. Consider also whether the business works with your industry, what the repayment terms and fees are, whether there are other hidden costs in the contract, and how quickly you’ll receive your funding. Don’t be afraid to check references and read reviews before signing on the dotted line.
