Having trouble getting a loan for your business? Consider
factoring your accounts receivable instead.
A factor works by providing a cash advance based on the total
value of the invoices that you provide as collateral. You typically
receive 80 percent of the invoice value upfront. Then you receive
the remaining value once the client pays the factor, minus a
factoring fee. This fee can be structured in any number of ways,
but it generally nets out to be about three to five percent of the
invoice value.
To quality for invoice factoring, your company must satisfy two
basic conditions. First, you should have no existing primary liens
on your accounts receivable. Essentially, this means that no other
company should have a claim on payments when they come in. This can
make it difficult for companies in certain industries like
construction to find a factoring company that will take their
invoices.
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Your customers must also be creditworthy. Factoring only works
successfully if clients pay their invoices. Your company's
creditworthiness will not necessarily factor into a decision to
approve or deny your account. Instead, the factor will focus on
evaluating your clients to determine whether and how quickly they
will pay their invoices.
There are many factoring companies ranging from small financial
service businesses to large banks. Not all will take your business,
though. Some specialize in particular industries like manufacturing
or medical. Others may require a certain minimum per invoice or
total invoice amount before they will conduct business with
you.
Take the time to compare your options when choosing a factor.
The pricing structure should be a critical point of comparison.
Using likely customer payment scenarios, calculate what the total
fees will be for the different vendors. Deposit or application
fees, the advance rate and monthly minimums should also be
explored. Finally, check whether a minimum length contract is
required and, if so, what penalties are assessed if you break
it.
Definitely inquire about how the factor handles unpaid invoices.
Some factors will assume all the risk and not require you to repay
the factor if the invoice is not paid within a set period of time
in what is known as non-recourse factoring. On the other end,
recourse factors will require repayment of funds plus the
factor's charges. Treading the middle ground are factors that
will allow you to swap in other invoices for the non-payers.
Finally, put yourself in your customers' shoes and inquire
about what the invoice handling process will be like from their
perspective. Look for a company that is as focused on customer care
as you are. You should know that many factoring companies adhere to
"notification factoring" where it is clearly indicated on
the invoice that payment should go to the factor.
Getting paid in advance for your invoices, even with a
percentage taken off the top, might be the right step for your
business to take. In this new math, factoring your invoices can
help your revenues multiply.