Factoring can be a lifesaver for companies struggling with working capital issues. Small business factoring companies can also enable your company to grow by giving you the capital you need. It is much easier to set up a factoring agreement than to get a bank loan, and the entire application process takes only days instead of weeks or months.
The way factoring works is simple enough. You sell your invoices to your factor, and in return you get a cash advance right away, at around 80% of the value of the invoice. The rest of the payment comes to you when the customer pays in full and after the factor takes its fees.
But while factoring can be a very helpful funding tool, not all small business factoring companies are equal. Some factors are more suitable for your business than others.
Do You Fit the Requirements?
Like banks, some factors have specialties and preferred customers. For example, some factors specialize in medical factoring or in construction. They have the experience working in these fields and they know a lot about the details of the industries they cover. So if you’re not in any of these industries, then its better for you to consider other options.
Other factors have minimum or maximum funding requirements. For example, some may require a minimum of $250,000 in total invoice value, while others can offer funding of only up to $50,000.
What Are the Advances and Fees?
Some factors offer the typical 80% advance while offering lower fees as a come-on. Others offer 90% advance or even more, although their fees for their funding can be anywhere from 1 to 6 percent. It’s up to you whether the higher advance rate or the lower fees are more important. If you’re really lucky, you may even find a factor that offers a high advance rate and low fees.
The first thing you need to look out for is the transparency of the rates. The best small business factoring companies tend to spell out their rates clearly on their websites. Others make the information more obscure, and some even trot out misleading information about their rates. You need to know about all the hidden fees involved so you can compare the rates of the factors you’re considering.
You should also take note of the penalties for late payments. Some penalties can be rather harsh.
And then there’s also the matter of long-term contracts. Some may lock you into a factoring agreement for 2 years, charging exorbitant fees should you opt out. But others may not require contracts, and some even allow you to pick and choose which invoices they can factor.nsuitable Small Busine
Reputation Matters
This can be a very subjective aspect to consider, but nonetheless it’s important. So perhaps you may want to check out some finance-related forums to find out how a particular factor really operates. You also need to make sure that they treat their customers’ customers fairly, because in most cases they oversee the payment and collection process.
It’s undeniable that factoring can be invaluable to your business. Just remember to pick the right factor, because unsuitable small business factoring companies can create more problems instead of solving them.
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