Tips For The Best Factoring Companies
For small business owners, it is not that easy to secure a loan, especially when you need instant cash to fund growth or fill in the gap in your cash flow. Traditional lenders can be quite strict when it comes to securing a business loan even if you have good credit standing. That is why many businesses turn to invoice factoring companies. Over the years, this has become a widely popular financing option among businesses, especially small and medium enterprises. So, what makes it a viable financing option?
What is Invoice Factoring?
Invoice factoring is also known as invoice financing or receivable financing. Businesses who sell products or services to their clients will issue an invoice. It will then take a few weeks before the client pays for the invoice. Business owners can loan these invoices through factoring companies in order to have fast access to funds. You do not have to wait for weeks to get the money.
Facts About Factoring Rates
With invoice factoring, you get to have the funds that you need for your business. It is very useful to boost your working capital so you can grow your business. This type of business loan might be a bit more expensive compared to other financing options. But it gives you different advantages that you cannot find in traditional loans.
How Does It Work?
There are three parties involved. First is the business owner who issued the invoice. The other parties involved customers and the financing company that will provide funds for the unpaid invoices. Once the business delivers certain products or services, they will issue an invoice. To get the funds, these business owners sell their invoices to the factoring company. The business owner will then get around 70% to 95% of the value of the invoice.
Advantages of Invoice Factoring
In getting an invoice factoring, there are various advantages that you can get:
- Invoice factoring offers a fast and hassle-free application. You do not have to wait that long and you don’t have to submit tons of paper works.
- It offers quick funding that will help improve your cash flow. This is very useful for business owners especially when they need instant funds.
- Another advantage is that line of credit is quite flexible. Since it is based on the invoices, the line of credit can actually grow. This gives you a reliable financing option that will support your business growth,
- Most invoice factoring companies allow you to extend your payment terms from 30 to 60 days.
Disadvantages of Invoice Factoring
Compared to other types of financing loan, invoice factoring actually has fewer disadvantages. Of course, the rates may be slightly higher especially since factoring companies compared to traditional banks. But at least you don’t have to use any asset as your collateral. If you need quick funding, this is a good way since you use your invoices as your collateral. However, you cannot also avoid any problem that may occur. For instance, if the client who needs to pay your invoice on time is a late payer, then it can be a big problem.
Choosing an Invoice Factoring Company
Now after weighing your choices and you have finally decided that this is the best financing option for you, how do you choose an invoice factoring company?
- Make your own research: Lending companies often have their respective websites that you can browse for information. It helps that you really spend some time reading information about the company. Are they licensed to operate in your state? How about the information about terms and conditions? A reputable company is expected to be transparent and they should be able to provide all of the information that the client needs.
- Know more about the application process: Since it is not a traditional business loan option, most people would think that all factoring companies offer fast application. But this is not always the case. There are some that may require you a lot of paper works. That is why it is very important that you know all of the documents and other requirements that they need. That way, you can easily make a comparison and choose the best lending company.
- Read the complete terms and conditions: Before signing up for anything, you have to read the complete terms and conditions. What are the payment terms? How about the factoring fees? Are there other costs? Do not be hesitant in asking all of the questions that you do not know.
- Read comments and feedback: You may be reading information on their website. But nothing beats than having actual information. It actually helps that you have first account information. By reading actual comments and feedback, you get to have a feel for the company. It also helps you assess as to whether they are reputable and legitimate.
Your choice as to whether you will go for an invoice factoring company or to another lender will actually depend on the different financing options that you have as well as your needs. If you are in need of quick funding and you have a poor credit score, invoice factoring might just be the best option for you.