Getting conventional business loans is very stressful and this has made many business owners go for invoice factoring. Just like banks, working with factor companies have drawbacks as well. Determining whether invoice factoring is suitable for your business or company is a personal decision.
Some of the best factoring companies can help you deal with cash flow hiccups in your business. There are a number of customers or clients who make payments very late, and this can negatively affect your business if you don’t have reliable sources of funding. Waiting for 30 to 90 days for a client to accept an invoice isn’t the right thing to do. And since you need to pay for operational expenses such as suppliers, payroll or rent, you need to find an alternative source of funding such as invoice factoring.
Small as well as big businesses or companies can depend on factoring companies for advance payments but they can sometimes be costly. In fact, it is expensive as compared to conventional business loans. These companies will make advance payments of up to 95% of the amount on invoice but this depends on your invoice diversification, sales volumes as well as customer credit quality. Since some of these companies charge different types of fees, you can highly benefit from them if your company or business has a profit margin of 15%. So, you need to do a good research to determine if invoice factoring is appropriate choice.
The most important thing factor companies cannot miss to check is if your customers or clients are creditworthy. The companies only accept invoices of your solid customers who then pay them the amount then they will pay you the remainder after deducting their fees. You will only qualify for invoice factoring if your commercial clients or customers have good credit as well as payment histories. These companies will check your clients’ credit including payment histories and then offer you advance payments.
Any factoring company will verify your invoices to determine to buy or not to buy them. This helps them in checking if your client is satisfied with your service or product. The verification process usually differ from one company to the next.
It is important to know if you are eligible for invoice factoring. It is very crucial to make sure that the invoices you are selling are free from security interests or liens. The liens can develop in case your business has unpaid loans and the loaning institution files claim your invoices as collateral. Taxing authorities can also file a claim if your company has tax lien. Liens can also be created if you have a court case or lawsuit. The good thing about factoring companies is that they can still work with you even if you have severe tax issues but you will need to hire a lawyer because the process is much more complicated. Even if a bank rejects your application, you can still get funds to run your business from a factor. The factor will look if your invoicing practices are good and if your clients have excellent credit as well as payment histories.