What is factoring?
Utilizing a factoring company allows you to provide a solution to your cash flow needs. Factoring is a form of financing in which a business sells its invoice to a third-party. The factoring advances the funds on a percentage of the invoice. It deposits the cash into your account directly. And once the invoice has been paid. The business owners use this type of financing to cover the payroll, and growth of the company. The benefit of factoring enhances a business’s working capital and cash flow. Other than waiting for 30 to 60 days for a customer’s payment. This can be introduced as account receivable factoring, receivable factoring, and invoice factoring.
How do you choose a factoring company?
This should be done carefully. The terms and conditions of factoring can depend on the industry and also by the company. Here are the things you can consider before choosing a factoring company.
Are you in need of an industry-specific factoring company?
The factors serve a range of industries. Other industries need specialization. These specialized industries involve health, construction, and transportation factoring.
What are the Terms and Rates?
Most of the factoring companies do not have the same terms or fee structure. Some factoring companies are claiming they are the best in everything. Then that is not the best one for your business.
These companies will go through the extra or hidden fees. For example background check, application, monthly processing, invoice submission, and field examination fees.
The factoring fees can range only from 1 to 5% per month on the value of the invoice. Other companies have very low fees of 1%. Still, they have hidden fees.
Factoring advances can range from 70 to 90% but it tends to be 80% for a non specialized industry. The advance rate is the percent of the invoice value that you will receive.
When you are searching for a factoring company. You need to find someone that has experience with businesses. such as factoring companies in new york. And it has been in business for quite a long time. The process of factoring invoices may be standard. Other industries are requiring different services than the others.
Does it offer recourse or nonrecourse funding?
The recourse funding requires the business owner to bond and assume the risk. And if their customer fails to pay the factored invoice. The non-recourse funding assumes all the risk of nonpayment of a factored invoice. The business owner assumes no risk. But given the higher risk by less than 20% of factors offer non-recourse funding. And those that have will have a higher fee structure.
When you are choosing a factoring company. You need to make sure that you choose a company that offers flexibility. Other companies are requiring long term contracts and monthly minimums. Choosing a factoring company that authorizes you to pick which invoices you want to factor. You need to steer clear of terms in which you have to factor in all the invoices from a particular customer.