Invoice factoring is a valuable type of alternative financing that has helped many businesses weather the storms of tough financial times. It’s also a helpful tool that can help your business grow without going into debt. To get the most out of factoring for your company, you should consider several pro tips. These suggestions can help companies that are trying alternative financing for the first time and businesses that currently use the service.
Know the Details of the Factoring Agreement
One of the most important tips is also one of the most frequently overlooked. Put simply, no two types of factoring are exactly alike. With any type of alternative financing, differences are the rule rather than the exception. This means that every lender approaches things differently.
You need to carefully read the terms and conditions of individual agreements. Keep a copy for your records.
What details should you look for?
- What is expected of your company?
- How many invoices are involved in the factoring agreement
- How much factoring costs
- What fees are charged in addition
- What percentage of funds are provided upfront
- What happens if one of your clients doesn’t pay
- How long does the agreement last
The good news is that a trustworthy factor is more than happy to answer your questions. The lender wants to put you at ease, so it shouldn’t be a problem to get the details you want.
Understand That Every Business Is Different
One of the most frequently asked questions from business owners is “Should I use factoring?” This question overlooks the fact that the answer is different for every company. For some businesses, choosing to factor invoices has been the greatest decision ever, improving cash flow and increasing profits significantly. For other companies, using invoices this way may not be a good investment.
How can you tell which category your business falls into? You need to think about two main areas: your customers and your finances.
Know Your Financial Needs
As far as finances are concerned, you may need factoring if you have trouble with your cash flow more than your revenue. In other words, you have plenty of sales every month, but the money isn’t coming in at the right time.
To benefit fully from factoring, you need invoices from customers with good credit. Manufacturers and healthcare practices can generally meet these requirements easily. For small businesses the credit rating of clients can be hit or miss.
Overall, factoring can accelerate cash flow to help businesses cover expenses while building up capital for growth.