John Vera, Negosentro | Cash flow is one of the hardest business processes to master. The problem lies with the unpredictability of income and your ever-changing needs. Some months, you have so much extra cash that you can afford to give bonuses to your hardworking staff; other months, you barely have two quarters to rub together, but you still have to purchase more inventory. Even established businesses struggle to find balance in their cash flow – which is why so many businesses end up turning to factoring.
Invoice factoring goes by a variety of names in different regions of the world, including accounts receivables financing, invoice discounting, invoice financing, and even just “factoring.” The service is amazingly simple and outrageously beneficial, especially when you have long struggled to sustain your business’s cash flow. If this is your first time learning about factoring, be not alarmed: This guide will teach you everything you never knew about this invaluable business financial service.
What Is Factoring?
Factoring is hardly more or less than a transaction involving a business’s unpaid invoices. The process is simple: You sell your unpaid invoices to a third-party company, called a factor, at a discounted rate in exchange for fast and easy cash. Then, the factor takes the responsibility for contacting your clients and collecting payment, which the factor keeps.
Factoring is advantageous for a few reasons. First, unlike loans, factoring does not require you to pay interest on the money you receive. Most factors allow you to choose whether you are selling individual invoices or a minimum amount of all your accounts receivable, and you can determine whether you need to factoring services just once or whether your business would profit from a standing contract. Ultimately, factoring allows you to regain control over your cash flow, improving your chances of establishing business success.
Unfortunately, not all businesses are able to use factoring services. Typically, only businesses with business or government clients are able to find affordable factoring options, like a factoring company for truckers who are part of the B2B business category. While some factors will consider working with business-to-consumer companies, they tend to charge higher rates because consumers are less reliable than businesses or governments. Furthermore, most factors expect factoring candidates to have a business history of at least two years, which raises the likelihood that you have enough consistent and responsible clients to make the transaction profitable for the factor.
One qualification absent for invoice factoring that is typical of other financial products is credit history. Because you are not taking a loan or paying interest, your business’s creditworthiness is of no concern. However, you should be aware of the creditworthiness of your clients, whose scores and history might affect your factoring rates.
Which Factors to Trust
Most of the confusion surrounding factoring exists because factoring goes by so many different names and many of those names are shared with other financial services. For example, accounts receivable financing could be factoring, or it could be a loan product that uses a business’s money owed as collateral. Therefore, when you seek factoring services, you should verify that what you’re getting is what you want – which means you must research your potential factors before you sign away your invoices.
Investigating and comparing factors is important for another reason: Not all factors are trustworthy. Invoice factoring, unlike other financial services, isn’t highly regulated by the government or private agencies, which means there can be a wide degree of variation between one firm and the next. While you are gathering information about factors, you must ask for an itemization of rates and fees as well as a clear description of terms. Factors that are unwilling to surrender these documents, provide poor, unprofessional customer service while doing so, or produce unaffordable numbers aren’t worth your time.
When to Factor
Whenever you need to bolster your cash flow, you should engage in factoring. Businesses in nearly all industries practice factoring at various times throughout their business lifespan. If you are a seasonal business that experiences months of lower profits, you might choose to factor to attain your earnings sooner to pay for supplies and employees. If you are striving to grow your business by investing in new equipment or premises, you might use factoring to make purchases earlier rather than later. In any instance, your cash flow is not sufficient to support your business needs and dreams, you can – and should – factor.