Are you currently experiencing difficulty in getting a loan for your small business? You can consider factoring your accounts receivable as an alternative. In Invoice Factoring, a factor works by offering a cash advance based on the overall value of the invoices that you offer as collateral. By using factoring, you generally get 80% of the invoice value in advance. And after that you get the remaining 20% value once the customer pays to the factor, excluding a factoring fee.
This factoring fee can be managed in several ways; however it usually offsets the value of multiple positions or payments about 3-5% of the invoice value.
To make the grade for the invoice factoring program, your business should fulfill two of the simple conditions. Primarily, you don’t need to have any existing primary liens on your accounts receivable.
Basically, this suggests that no other company should have a claim on the payments when they cross the line. This can make it rather tough for the small businesses in some specific industries such as construction business to find a factoring firm that will take their invoices.
For factoring, your customers need to be creditworthy. Invoice factoring program works effectively only when your customers pay their invoices. The creditworthiness of your business will not certainly factor right into a decision to accept or refuse your account. However, the factor will focus on checking out your customers to find out whether and how promptly or quickly they will pay their invoices.
There are many invoice factoring firms out there in the market ranging from small financial service firms to large traditional lenders. Not all lenders will take your small business, however. Some lenders specialize in industries such as medical or manufacturing. Others may additionally ask for a certain minimum per invoice or overall invoice amount before they’ll carry out business with you.
You need to take your time to examine your options while picking a factor. The pricing arrangement should be an important point of evaluation. Using likely customer payment setting, estimate what the overall costs will be for the different vendors.
Application or deposit charges, the advance fee and the monthly minimums should be investigated. Consequently, make sure whether a minimum term agreement is needed and, if that is the case, what would be the penalties in case you break it.
Clearly ask about how the factor handles the unpaid invoices. Some factors will accept all the risk related to the unpaid invoices and not ask you to pay off the factor if the invoice is not paid within a set time frame in what’s referred to as a non-recourse factoring. However on the flipside, in recourse factoring, the factor would require reimbursement of funds in addition to the factor’s fees.
In the long run, put yourself in your customer’s situation and ask about what the invoice handling process will like be from their point of view. Looking for factoring firm for account recieveable that focused on customer care. You have to understand that many factoring firms stick to notification factoring in which the payment should go to the factor.