If you’re running a business, you likely have heard all about the benefits associated with invoice financing business loans. There’s no doubt that it’s the easiest way to obtain cash your business needs, especially if you can’t qualify for a traditional business loan because of a bad credit score.
If you’re experiencing growth or cash flow issues, invoice factoring can provide the necessary funds to keep your business operations running full steam ahead.
When you as a business owner decides that invoice factoring is the right solution to solve your cash flow needs, it’s also important you consider the invoice financing company you’ll be working with.
You need to be vigilant regarding the company so you don’t end up losing money. Before choosing a factoring company, it’s important to you investigate them.
Here are some things to consider when selecting the right invoice factoring company to work with:
1. Fees and Rates
Fees and rates are the two things that immediately come to mind when choosing the right invoice factoring company for yourself. For this reason, it’s important you do your research on the pricing of the companies you’re trying to apply to, and compare them to each other.
Be sure you ask for all the fees they charge for the transaction. If you’re not careful enough, you could end up paying for more than what you bargained for.
It’s normal for factoring companies to charge fees for some of the invoice factoring services. For instance, they can charge administrative fees among other fees associated with invoice factoring. Some companies may also charge a low-interest rate at the beginning.
However, by the end of the funding period, they can include charges like the average purchase volume, number of invoices, or number of customers. Even a slight change in these charges can create a difference in the fees you pay.
2. Type of Factoring Offered
Invoice factoring is further subdivided into two categories: Recourse and non-recourse. When the company offers a recourse invoice factoring, this means you have to assume the risk by guaranteeing the funding. In this type of arrangement, business owners take responsibility for their clients’ unpaid invoices and buy them back in the event a client fails to pay.
Non-recourse, on the other hand, is not guaranteed by the business owners. The factoring company absorbs all the risk involved in the transaction. This means that if the client’s customer fails to pay the invoice, the factor faces the loss and the business owners remain unscathed. This type of arrangement, however, may be associated with a higher fee structure considering the nature of the transaction. Because of that, factoring companies rarely offer this type of funding.
3. Contracts and Penalties
When doing business with a factoring company, you may be required to sign an agreement/contract. Factoring companies often use contracts to make sure their clients meet a minimum set of requirements. This document will state all the terms included in the transaction, including the period, rates, and the penalties for an early exit.
In choosing the right invoice factoring company, be sure to read the contract they provide. Some companies may have hidden fees and penalties that you otherwise will not be aware of unless you read the fine print thoroughly. Take note of the penalties and the conditions in which the penalty could be applicable. Consult with a financial advisor, if you must, before you decide.
Quality of Service
When planning to work with a factoring company, it’s always important to observe the quality of the service they provide. So, be sure to find a company that can provide your company with what you need. If you can, check and see if they can provide you with an amount of capital you need to keep your business going.
Unlike traditional bank loans, invoice factoring is easy to qualify for and approval is usually fast. This makes it an ideal option for businesses that require immediate cash. Ideally, you should receive an approval within 24 hours. When choosing the right factoring company, business owners shouldn’t just look at the rates, rather, they should also be aware of the kind of services they offer their clients.
Lastly, you should always consider the stability of the invoice factoring company you’ll be partnering with. They should have experience in various business industries, including your industry. Additionally, they should also have a reliable track record in the financing industry.
The best way to know if the factoring company is reputable is by checking with the International Factoring Association (IFA). All factoring companies that are affiliated with IFA are required to follow specific rules and guidelines. These are guidelines that ensure members are caring out their business in a professional manner that is in line with their stated standards.
Is Invoice Financing Business Loans Right for Your Business?
In a nutshell, invoice factoring is one of the best solutions available for small business owners. This type of financing arrangement can free up available cash which can be useful in solving cash flow issues.
However, entrepreneurs can only reap the benefits of invoice factoring if they take the time to consider these things when choosing which factoring company is best suited for them.
So, before moving forward with your application, take the time to study the different companies offering invoice factoring. Speak with a qualified financial expert to learn more about how you can use invoice financing business loans to achieve success in your industry.