Your customers may dislike dealing with an outside company during the payment process. When your customers learn that you are using a factoring arrangement with another company, it could damage your relationship and reputation. Since invoice factoring involves selling your invoices to an outside company, your clients will often know that their invoices are the subject of a factoring arrangement (through a process called notification). The factoring fee, sometimes referred to as the discount rate, is a flat or variable fee that may be a one-time upfront payment or an ongoing rate that may go up the longer the invoice goes unpaid. Invoice factoring carries the potential to become expensive. You could sell just one batch of invoices to a factoring company, or you could enter into a longer term or ongoing relationship. The factoring company would collect a fee when the invoice is paid, then send you the remaining amount. Generally, factoring advances are 70% to 90% of the value of your unpaid invoices.
Factoring companies may also be involved in other forms of commercial asset-based lending, such as accounts receivable financing. A factoring company is a type of commercial financing company that provides services such as purchasing invoices, paying cash advances on the invoices and performing collections duties. Invoice factoring is a financing arrangement where a business owner sells invoices to a factoring company in exchange for a cash advance. Tips for applying for invoice factoring What is invoice factoring? How does the process of invoice factoring work? However, invoice financing can be more costly than other forms of business financing. To keep bills paid and payroll funded, a business-to-business (B2B) company could turn to invoice factoring, even if the company has a limited or poor credit history. If you do, you won't be blindsided by any hidden dangers in your factoring contract.Invoice factoring, which involves the sale of invoices to a factoring company, allows companies to unlock cash tied up in unpaid invoices. If your contract requires that you meet a certain invoice threshold, make sure that your business generates enough sales to allow you to satisfy these terms.īefore you sign your invoice factoring contract, take the time to familiarize yourself with these essential parts of your terms. Another question may relate to the number of invoices you will be expected to factor each month. For example, will you be held liable in the event that your customers default on their invoices? If so, you may want to request a non-recourse factoring option that will absolve you from responsibility in this case. Possible Areas of ConcernĮven if you find that these particular issues are handled satisfactorily in your contract, there may be other areas of concern. It's true that invoice factoring is not a loan, but if your customers' credit history is sketchy, you may have to put up something of value to guarantee their repayment of the factoring advance. Yet another contract area for attention is the issue of collateral. Be sure to look for any contract term requirements. One of the biggest benefits of invoice factoring is its flexibility, but if your contract stipulates that you factor invoices for a certain length of time, you may lose the flexible funding that factoring should provide. Some firms may only charge two to three percent, while others can have rates as high as ten percent or more.Īnother important part of the factoring contract is the stated term. Factoring fees vary widely from company to company. The biggest issue of your contract may be the stated fees. There are several aspects to a factoring contract, but you really need to concern yourself with a few principal pieces of information: the contract fees, the contract length, and possible collateral requirements. Essential Aspects of a Factoring Contract Here is a breakdown of what you should know about invoice factoring contracts. No matter how good your factoring agreement may sound, the actual contract terms may betray the true costs of your plan. Some business owners are so anxious to begin the factoring process, though, that they neglect to look over one essential piece of paper: the factoring contract. If you've been hearing about the benefits of invoice factoring, you might be excited about the prospect of getting your invoices paid early and avoiding some of the typical accounts receivable duties.
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