When you need a quick infusion of cash, you can use your accounts receivables invoices to get up-front money from a factoring company. The factoring company can get anywhere from 3-5% of the total value of the invoices (some companies even offer less), and in return you get that money immediately instead of waiting for a month or two for them. But the invoice factoring financial services you receive doesn’t stop there, which is why you may be charged service fees by a factoring company.
There are essentially 4 types of invoice factoring financial services you may receive as part of the factoring agreement:
1. Assessing the Credit-Worthiness of Customers
In some factoring agreements, factoring companies are willing to take on the risk on a customer’s ability to pay. This type of agreement is called nonrecourse factoring. The typical form of this type of agreement means that you are not liable if a customer is unable to pay the bill because of insolvency. Another type of nonrecourse agreement absolves your company of any responsibility at all for a customer’s inability or refusal to pay the bill. The only exception here is when that refusal is due to a customer’s view that your company did not provide the goods or services they paid for. When that happens, your business is still liable for the amount.
Before the factoring company shoulders this responsibility, they will make an assessment as to which of your customers appear able to pay the bill they owe your company. Knowing which customers are worthy of credit and which ones are not can help you determine just how much credit to offer particular customers.
2. Maintaining the Accounts Receivable Ledger
It’s important that you have a record of how customers pay their bills. These records will indicate which customers pay on time, and which ones require installment plans in order for them to pay the total bill. Again, the information here can help you determine which customers are worthy of receiving preferential treatment when it comes to getting credit from your company. These records may also be important for your tax records.
3. Maintaining Regular Reports on Collections
As a business, you will want to know how the bill collection is progressing over time. A factoring company can make weekly or even daily reports on the collection process for your records.
4. Contacting Customers
Having a factoring company do the collections for you means you are spared from having to contact customers yourself. You also don’t have to hire permanent staff in order to fulfill this function.
However, since the factoring company will be dealing with your business’s customers, you may want to make sure that the people from the factoring company who interact with your customers do so in a professional and courteous manner. The best factoring companies offer great customer interaction as part of their invoice factoring financial services.
You don’t want to alienate future relations with your customers, as they will affect your bottom line eventually. For some businesses, entering into a factoring agreement may be temporary, but relationships with customers are long-lasting.