Invoice factoring is a way for companies to raise quick cash. It involves selling invoices where payment is due to a factor, who pays money now in expectation of getting the full amount later. It isn’t new – factoring was common in England as long ago as 1400
1. Is it the right option for your business?
It’s fast – most companies with good credit and valid invoices can get approved within a few days. Some online factors make the process even faster by making application and approval purely digital.
It’s also flexible. A company can factor only those invoices it needs to raise sufficient capital.
Credit score and revenue history are usually not barriers so long as:
* The customers owing the money must have good credit and not be new startup companies.
* The invoices factored must be due within 90 days and free from liens or other debts.
* Your business has no history of tax debt or other legal issues.
* You must be a B2B company as consumer invoices can’t be factored.
3. Spot or long-term
Most factors offer “spot” factoring, which means it’s a one-time transaction- there’s no more obligation. Other factors may require a long-term deal based on customer contracts. They might require you to factor $20,000 a month for the next six months. Of course, this costs six times as much in potential profits, but if need is dire, there may be no alternative.
4. Type of industry
The type of business you’re in can also affect factoring terms and costs. Some factors provide cash only to companies within a certain industry, or may have higher or lower rates for certain industries. Some factors won’t work with specific industries at all. It’s important to ask upfront if the factor will even do business with your company.
It’s also important to do business with an experienced and respected factoring companies. There is a national body overseeing factors, the International Factoring Association. But it’s important to exercise caution. Some less respectable factors will employ varying fees and charges hidden in the small print.
Invoice factoring can be more complex than a loan because business may change dynamically from month to month even with the same customer. But it can be a great help for companies finding themselves low on cash, in that you get paid for the outstanding invoices quickly but it’s up the factor to collect on them. As long as clients pay their bill on time, you can cash in on invoices whenever some quick capital will help.