It is not always easy to synchronize receipt and expenditure of cash in business. Thus, it is critical that you get a reliable source of money to bail you out when you find that you are unable to pay your utilities, employees or even vendors. You may avoid crippling your business operations, by choosing to engage in practices such as factoring, to help them to raise instant cash.
Invoice factoring entails selling the unpaid invoices to a third party. Companies that provide services to the government will always have to wait for some time before payments are made. After delivering the goods or services, government bureaucracy delays payments. In some cases, the waiting period could be longer than six months. In this case, the businesses must talk to Invoice an invoice factoring company to buy the invoices and give them the much-needed cash. The business receives cash for immediate use while the invoice factoring companies wait and collect their money when the invoices are due. Here are key elements of factoring:
1. Mastering the terms used
Factoring Terminologies
Account debtor: it is the client responsible for paying the sold invoice.
Advance rate – It is the amount of money the business receives immediately after factoring the invoice. The amount falls between 75 to 85 % of the value of the invoice.
Reserve – It is the portion of the value of the invoices that is retained by factoring company which may be used to meet payment expenses including bad debt expenses.
Factor- refers to the factoring company
Factoring Period – refers to the time between when the factoring company purchases the invoice and the time the customer remits the payment of the full amount on the invoice. The period could range between 30 to 90 days.
Invoice discounting – it refers to the accounts receivable financing, which refers to a business loan received after using the accounts receivable as collateral.
2. Knowing the payment habits of your customer
The success of Invoice factoring for small businesses is largely based on the business credit score. It determines how much money you’ll finally receive. Your customer’s creditworthiness may influence the amount of money that will be advanced to you and the interest rate you will be charged. Note that your credit score doesn’t matter what matters is your customer’s credit score or his creditworthiness. It means that looking at your customer’s payment tendencies or their credit score is critical and must be considered before you submit their invoices for factoring. Look at whether they pay on time or if they are on the list of the late payers. If their credit score is not in good shape, it is advisable that you don’t factor their invoices but wait for them to make payments when they fall due.
3. The rates, the fees, and the charges
Most invoice program for small business is meant to help small ventures bridge the gap between receipt of cash and expenditure. A few companies have a good reputation and offer good rates to help the small businesses to grow. However, there are a few rogue companies that charge their client exorbitantly. Such companies should be avoided since they will deplete your hard earned money. Ensure that you ask them the following questions:
Are all the fees you charge expressly noted?
Are there surprise charges, if they are what circumstances lead to such charges?
Do you have a limit on some invoices you can factor in a week, a month or yearly?
Does your company offer customer care support on a 24/7 basis?
4. Knowing the needs of your business
There are many types of invoice factoring. However, your business needs should determine the factoring you should choose. If your business has strong seasonal sales, short-term factoring is required to help you keep your business running during off-peak seasons. Also, if you are planning to expand your business to help you keep your costs low, you may need a partner that offer invoice financing for small business to help you achieve your goal.
In conclusion, it is important that your company sits down with a factoring company and discuss their terms. Doing business with a company that offers trustworthy factoring is critical to your business. Also, working with a factor with a strong team is important since it will help your company avoid customers with a poor payment history. Learning more about the ins and outs of factoring and help your business stay afloat during off-peak seasons.
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