Invoice factoring is a business financing solution that has been gaining popularity as an alternative to conventional business loans. This article helps you determine if invoice financing is the right solution for your business. We guide you through five questions to ask before considering a factoring facility.
1. Can my cash flow problem be fixed by factoring?
The first question to ask is if invoice factoring is the right solution for the type of financial problem that your company is facing. Factoring helps companies that have one very specific problem: they can’t afford to wait the usual 30 days to 60 days to get their invoices paid. Basically, if you need funds to pay operational expenses (such as payroll, rent, suppliers) and can’t wait until you get paid by your customers, factoring may be able to help you.
2. Do my profit margins allow me to cover the cost of factoring with a comfortable profit?
Although factoring has a number of advantages, invoice factoring is not the cheapest form of financing in the market. It costs more than many bank-offered forms of business financing. Costs vary based on your sales volume, invoice diversification, and customer credit quality. As a rule of thumb, companies can benefit from factoring invoices if their profit margins are at least 15%. Note this is not an absolute rule and every situation is unique. Ultimately, the company owner or CEO to determines if factoring is a good fit for the business.
3. Are my customers creditworthy?
The premise behind factoring is that you can sell invoices from solid customers to a factoring company, who pays for them upfront. For factoring to work, your customers must have good commercial credit and the amount of credit that they qualify for must be more than the amount of their invoice. Most factoring companies check commercial credit using a Dun and Bradstreet commercial credit report and formulate their decisions using this report.
4. Will my customers support my decision to factor invoices?
Most factoring companies verify invoices before purchasing them. The verification process helps them determine that the work or product being invoiced has been received and is acceptable to the customer. It’s important to note that the verification process requires customer contact. Each factoring company has its own verification procedure, and the procedures are usually designed to minimize customer impact.
5. Will my company qualify for factoring?
Last, but not least, you should evaluate whether your company qualifies for factoring. One important detail is that your invoices must be free and clear of liens (security interests). Three common situations could create a lien on your invoices:
- If your company has a previous business loan, it’s likely that the bank filed a lien on your invoices to secure collateral.
- If your company has a tax lien, it’s likely that taxing authorities have filed a lien.
- If you have a lawsuit, it’s possible that your accounts receivable are encumbered by liens.
Aside from not having a lien on your accounts receivable, your company should have good invoicing practices and a track record of delivering your product or service with minimal (if any) problems.
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Are you looking for a factoring quote? We offer high advances at low rates. For more information, please call (877) 300 3258.