Factoring is a method of generating income that does not involve taking out a loan or a line of credit. A factoring company purchases your unpaid invoices of goods and services that you have already provided and collects money represented on them from your customers for a percentage of the amount owed. How do you know you are choosing the right company to provide this service, though? There are three main factors to consider.
The Company’s Experience
The longer a factoring company has been collecting payment on invoices, the more successful they are likely to be and thus the sooner you will get paid. Check their credibility by gauging other clients’ satisfaction, whether through networking or through written reviews. It is also a good idea to choose a company that has factoring experience in your particular industry. This tends to make the process run more smoothly.
The Speed of Payment
Another factor you must consider is how quickly you need the payment. Some companies can get you the initial cash for your invoices within 24 hours. Others have a longer approval or setup process that delays the rate at which you receive that first payment. Make sure the timeline of the factoring company works well for you before you choose to engage their services.
The Services Available
Sometimes these companies offer more than just the purchase of invoices. If you are short on personnel and need a company that performs credit checks or take a more hands-on approach to managing your accounts receivable, it is advisable to seek out a company that provides those services. This allows you to keep your focus on other aspects of running your business.
The Risks Involved
You want a company that complements the level of risk with which you are comfortable. Decide if you want a short- or long-term contract, and find a company that is willing to work with those terms. You also should decide whether you’d rather work with a recourse or non-recourse company. If you choose a recourse firm, you may get a percentage rate that favors you, but you also must buy back any invoices that your customers don’t pay. A non-recourse company does not require you to purchase unpaid invoices, but it is likely to charge a higher percentage rate in order to be willing to take on that risk.
When choosing a factoring company, it is important to find one that fits your needs. Analyze your options carefully to ensure that you are getting paid when and how you want to get paid.