Invoice factoring is a financial service which increases your company cash flow by giving you payments against your pending receivables from your customers. Normally, when you draw up an invoice against your sales to a regular customer, you might have to wait for around 30 to 60 days for your payment. Invoice factoring companies "buy" the invoice off you for a pre-determined fee and then collect the invoice amount from your customer on the due date. This arrangement is advantageous for you since it gives you around 60 to 90 percent of your payment immediately thereby giving you a chance to pay off salaries, your suppliers, or indulge in quantity purchases.
Selecting the right factoring company is very important since you need to work in perfect harmony with a third party and this should not be a obstacle in your smooth functioning. There are many factors to be considered while choosing the right factoring company. One of the important factors is to consider a company or the correct size financially to handle your account. Choosing a company that handles only big accounts might not be able to give you the same service if your monthly volume is small, and a very small company might not be able to make your payments in time if your monthly volume is big. So choose a company that can comfortably handle your account and offer you good service. Also try and tie up with a company that does not insist on a minimum fixed volume every month.
Most factoring companies also prefer to include the "Recourse" clause, which means that they can re-sell your invoices back to you in case the customer is unable to make a payment against that invoice. However, there are some companies offering "Non Recourse" in which they absorb the liability in case the customer is unable to pay up. This would be better for you as this would reduce your headache in case your customer falters in making the payment. There is also a fixed time for your contract with a factoring company, which will enable you to get a better rate of discount on your invoices, but if possible, include a termination clause which will allow you a month or so to terminate the contract if you are unhappy with the services or any other reason.
Factoring companies charge a factoring fee and this varies from 1.5 percent to 15 percent, depending on factors such as the credit worthiness of your customers, your monthly volume of invoices, and also the credit period of your customers. So the fee percent will be small if your customers are reputed and prompt in their payments, their invoice values are big and if you have given them less credit period and vice versa. While this factoring fee is important, it should not be the only criteria in choosing a particular company. Their service record is equally important and it pays in the long run if you have to pay slightly more to get better service and your payments on time.
A factoring broker can also help you find the right factoring company, since with his experience it will be easy for him to slot you with the right company. You may also not have to pay him any brokerage since normally, it is done by brokering companies.
So, the above pointers should guide you in the right direction in finding the right factoring company to compliment your business and help you grow fast without any financial constraints.
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