Accounts receivables factoring (also known as invoice factoring) involves exchanging invoices of a company to a factoring company as a form of cash advance. These cash advances are usually a percentage of the total money owed by customers to the company, and the factoring company gets a percentage of the money as compensation for its services. This fee is called the discount rate, and if your company is considering using account receivables factoring as a method of raising cash quickly for your working capital, then you should find ways of lowering this discount rate as much as possible to lessen the financial costs to your company.
Choosing a Factoring Company
One of the ways of getting a lower discount rate is by choosing a factoring company wisely. Try to get a quote from several factoring companies instead of just dealing with only one, so that you can compare the amount of money your company can get as well as the eventual fees that your company will have to pay.
You may also want to consider availing the services of a reputable and experienced broker to help you choose. Brokers often possess the expertise, as well as the time, to choose the right factoring company for your company and for its present financial needs. Brokers charge only a small fee, and with their service, you will know which factoring companies have less than stellar reputations. Avoiding such unprofessional companies may not only save you from misunderstandings and disputes but may also salvage your reputation with your current customers.
Negotiating With a Factoring Company
If you are getting quotes from multiple factoring companies, your company may be able to obtain a much better deal. There are two money factors to consider here: the upfront advance and the discount rate. Some factoring companies may offer a larger upfront advance in exchange for a higher discount rate.
You may also wish to consider an open-ended agreement with the factoring company, even if you think that you will avail of factoring services just this one time. Not only will you receive a better deal if the factoring company knows that you will approach them first for factoring services next time, but your company may also save money by no longer having to pay setup costs.
Dealing With a Factoring Company
You don’t need to submit all your invoices to a factoring company. Instead, you can submit just a few invoices which involve the largest amount of debts owed to you. This saves the factoring company from a lot of work, which can also lower the discount rate.
Factoring companies typically inform customers that debts owed to your company are to be paid to them, but to avoid misunderstandings and confusion it is also a good idea to notify your customers yourself. This allows your customers to plan for the different payment requirements and venues, and it saves the factoring company from a lot of inconvenience and headaches.
It also encourages your customers to pay without doubting the legitimacy of the collecting agency. This saves you from returning the advance money your company received and from paying additional fees for the accounts receivables factoring if the customer is unwilling to pay due to their doubts.
