One of the best ways to arrange financing for your business is through invoice factoring. Invoice factoring is when a company (also called a factor) pays you an advance for your invoices. Then you have ready capital to use in your business, and the company collects the money from your customer. However, you will not get the full amount of your invoice in factoring; the factor often keeps a percentage – usually between three percent and five percent – for the services performed.
But invoice factoring is very helpful in many circumstances. It is often easier to arrange factoring than it is to get traditional loan financing. Also, it is worth noting that in cases where cash flow is sporadic (while you wait for payment from customers), invoice factoring can ease things quite a bit. Instead of waiting 30 to 60 days until an invoice is pad, you can have the capital you need now for every day expenses that are associated with payroll, equipment, facilities, inventory and other needs.
However, you should not just settle for any factoring partner. It is important to consider a variety of qualities in the factoring companies you are evaluating.
Choosing the right factoring partner for you
There are many different invoice factoring partners available that can help you more effectively manage your cash flow. Here are some of the things to look for in an invoice factoring service:
Factor’s credit department. Find out about the size and quality of the factor’s credit department. Does the invoice factoring company have the ability to extend credit to a number of businesses? Are the rules reasonable? Does the factor only extend credit to stable companies? Good credit practices can mean the difference between success and failure in an invoice factoring company. You do not want your factoring partner to fail – leaving you looking for another company.
Professional collection personnel. In order to ensure that your factoring partner is viable, look into whether or not the company has professional collection personnel. Not only is the ability to collect on the invoices important, but professionalism is as well. Your factoring partner will be seen by your customers as an extension of your business. You want to make sure that your factoring partner is professional, so that it does not reflect badly on you.
Management of the factor. Also, look into how professional the management is at your invoice factoring company choices. Does the management personnel have a background in finance or some related field? You want to make sure that you are getting people who know how to competently manage a business. Also, as part of this, look into the financial fundamentals of the factor. You want to make sure that company is financially sound and follows good business practices.
Length of time the factor has been in business. You should consider how long the factor has been in business, and what its credentials are. If the factor has been in business for a long time, that is usually an indication that it is doing something right.
Industry specialization. There are many different factoring companies. However, some of them have more experience in some industries than others. You want to choose a factoring partner that specializes in your specific industry. Your factor should know and understand – and be prepared with solutions for – the unique challenges that are present in your industry.
Up to date technology. This may seem unimportant when you are considering an invoice factoring service provider, but it really is vital. You want to make sure that the factor is streamlined and makes use of the current technology. The infrastructure of the company contributes to its efficiency and overall profitability. Plus, up to date technology decreases the chance of human error and can allow for more detailed records.
Other clients that the factor services. Check into the other clients that the invoice factoring company has. Are they quality companies? If respected companies are doing business with a factor, it can be a good sign. Another thing you can do is get references and talk with representatives from a factor’s clients. This way you can get a feel for how the factor functions in general.
Carefully consider your options before choosing an invoice factoring partner. Make sure that the factor is right for you, even though this may mean an outlay of time at the outset. Making sure you have the right factor will mean years of a fruitful and helpful relationship that can help your business grow.