As a business owner, you understand that there are ebbs and flows to your income. Sometimes, you have an opportunity that you need to jump on right away, but it will put a major strain on the bottom line. Other times, the bottom line is already strained, and you need cash right away to keep your doors open. In either case, you need money quickly, and waiting for traditional financing from the bank isn’t necessarily an option.
While you have a number of options for alternative financing, one of the most cost-effective in the long term is invoice financing. Sometimes known as invoice factoring, invoice financing involves selling your unpaid accounts receivable invoices to a factoring company, it then pays you in advance for most of the value of the invoice.
Since factoring can give you access to funds quickly, and doesn’t require that you jump through the hoops associated with a traditional business loan (and in fact, because it’s not a loan, you don’t have to repay the advance), and it removes some of the hassles associated with collecting on invoices, it’s actually a very attractive option for many businesses.
However, before you jump in and sign up for a factoring service, you need to ask a few important questions. Armed with this information, you can make a decision that benefits your business both now and well into the future.
1. What Are the Fees and Costs Associated With Using the Service?
While working with a factoring company does give you access to your money quickly, there are some costs involved. Be sure to ask about the factoring rate, which is the percentage of the outstanding invoices the company takes before releasing the remainder of the money to you. These rates can vary and impact how much cash you receive.
You may also be subject to additional fees when you open your account; for instance, the factoring company will need to conduct due diligence on your customers to ensure that they are only buying invoices that will be paid, and those investigations require some investment of time and money. Be sure that you know all of the fees you will have to pay upfront, understanding that in the long run, the money that you save by not having to chase down slow-paying customers or pay high interest rates on other financing options will more than cover any factoring expenses.
2. What Do You Do About Slow/No Pay Invoices?
Some factoring companies offer what’s called “no recourse” factoring, which ensures that once you submit your invoices to the company, they belong to the factor, regardless of whether the customer actually pays the bill or not. This does tend to be more expensive, but it does eliminate your risk and the hassle of collecting on a delinquent customer yourself. Other factoring companies will return invoices to businesses when customers don’t pay, and if that’s the case with your company, you need to know upfront.
3. How Long Is the Contract?
Some factoring companies will work with companies for a short period, getting them through a rough patch or allowing them to expand. However, most companies prefer longer relationships with clients, and those relationships may benefit your business. When selecting a factoring company, ask about contracts, and determine whether a long-term relationship might be in the best interests of your company. Some companies may not require a contract at all, but will simply work with you when needed.
4. Who Will Be Managing My Account and Making Decisions?
As with any business relationship, you want to know that you have a point of contact who understands your business and who can answer your questions and help with issues when necessary. When choosing your factoring company, look for one that will provide you with a dedicated account manager who understands your business and unique needs, and is willing and available to talk with you when necessary.
5. What Is the Process for Submitting and Reviewing Invoices?
Finally, one important question that many businesses fail to ask is how they will submit their invoices for review. Some companies require original documents, while others will accept photocopies or even offer an online system for scanning and submitting. Before making a decision, be sure that you understand the process, and how long it will take for invoices to be reviewed and payments issued.
Choosing a factoring company is a big decision, and not one to be made on a whim or based only on which company appears to offer the lowest rates. Ask the right questions, and make a decision about alternative financing that will truly benefit your business now and well into the future.
