What is factoring? To put it simple, it is selling your invoices to a factoring company.
In this way, you get cash quickly and you don't have to collect the debt. Naturally, the factoring company will not work for free. You'll lose some of the value of the invoice
With small businesses, it is even more important to free up working capital through factoring. The money can be invested into new equipment, used to pay bills, or used toward payroll. Of course, the alternative is to chase the customer for the invoice payment and defer everything else while the money is tied up in the collection process.
How to choose the right company?
Nowadays, there are hundreds of factoring companies to choose from. Each of these companies presents its own set of benefits and advantages to using their services. However, there are a few tips and tricks that can be learned before setting out to find financing companies that will best suit individual needs.
First of all: find out the hidden fees.
This is an incredibly important step when finding a company that offers factoring services because many have hidden fees that are not mentioned initially. Find out exactly how each factoring financial services company regulates their factoring fees. That's the best way to not being disappointed at a later date.
Some companies will charge you these fees:
application fees,
due diligence fees,
new client fees,
money transfer fees,
lockbox fees,
termination fees,
minimum funding fees,
right to audit fees and
wire transfer fees.
That's not enough. Other factoring companies also charge unfair fees, such as:
fees for invoices that the factoring firm chooses not to fund,
fees for funding fewer invoices than usual during a month and
fees for same day funding.
Be aware of factoring companies that offer a very high advance rate on the factoring invoices.
These are the companies that typically have hidden fees. When it comes the time to get the actual finances, the rate becomes much lower.
Watch the costs.
Normally, with improved cashflow the finance grows in line with your sales, unlike more traditional methods of funding , such as a bank overdraft. But be careful, factoring is not the cheapest method of finance. Most businesses offset the factor's charges by adding them into their prices. The most successful generally use the cash to negotiate early settlement discounts from their suppliers - this should be an avenue to explore when considering the overall cost of such a service.
Sometimes there can be a minimum term for the contract, sometimes 1 year, or as long as 3 years. Such contracts can cause a problem if the factoring service does not bring the benefits you expect, or if your business changes course, or fails to achieve your expectations for growth.
The best way to choose.
The best way to select a financing company is knowing the history that they have. Do not stop at the first offer. Any good company will have a proved track record to accompany their claims. Usually, it is easily accessible. Remember: the best factoring companies are those that understand the needs of any growing business.
Andrea Becca is a professional journalist and a translator from English, French into Italian specialized in credit and banking topics. For more info: http://www.andreabecca.it
