When it comes to leveraging outstanding invoices for operational cash, factoring companies make the most amount of sense. This is a commonplace financial transaction between lenders and businesses. It happens when businesses have a great deal of money tied up in unpaid invoices. In order to have access to this cash without having to wait for slow to pay customers, a business will either use invoices as collateral or sell the invoices to a factor in order to get the money they need to keep the doors of their business open.
However, invoice details are only one aspect of factoring and it’s important to understand that not all factoring companies are alike. Some factoring companies work specifically for small businesses while other factoring companies may only work with larger businesses. In addition, the terms of a factoring agreement can vary quite significantly from one factor to another. That’s why it’s important to make sure that when a business is looking for factoring as a way to provide necessary operational cash, they are comfortable with the arrangements made between them and the factor.
What a factor will do is pay a business a certain percentage pursuant to an outstanding invoice. This percentage can be as low as 60% and, in some cases, it can be as high as 90%. However, factors also charge interest rates and transaction fees that can increase the amount a business will have to pay back to the lender. In addition, if the business chooses non-recourse factoring, which means that the factor cannot go after a business if the invoice isn’t paid, this can increase the costs. Since the factor will need to purchase factoring insurance, this will be reflected in higher fees and sometimes, higher interest rates.
What this means for your business is understanding the economics and the costs behind factoring. Some factors may charge higher fees and higher interest rates which may cause undue financial strain to a small business. In these cases, it’s best to look for a factor that has a fee and interest structure that is more conducive to small businesses. In any case, taking the time to search out the right factoring company or to use a service that puts businesses in touch with different factors is essential in making the best financial decision possible when your business needs and inflow of cash.