What are the things to think about if I decide to factor an invoice?

Factoring is a great opportunity for some businesses to get an advance of funds on their accounts receivables but can be a strange and new process for some to consider. Even though forms of factoring have been around since the 1600’s, it is somewhat unknown or considered to be the last ditch effort to save a failing business. However, factoring can be a very powerful tool to fund business growth and corporate expansions when used correctly. It’s hardly the last resort of a financially doomed company.

Practical questions to ask

Before considering factoring for your business, you should consider a number of aspects and ask potential firms some vital questions. How long does the application and approval process take? In most cases, the application is short and simple, and approval can be provided within 24 hours. Your first funding can be wired to your account within just a few short days with additional funds being provided on a next-day basis. How is my account information provided? Be sure this is secure, and feel free to demand this be state of the art and secure online access at all hours of the day. For firms unwilling or unable to provide this level of security, consider it a red flag, and take your business elsewhere.

Fees and hidden costs

Loans from traditional banks can sneak in some additional fees or tack on costs for early, late or missed payments. This can directly harm your business credit and debt over time, so most business owners stay clear of standard loans. Factoring firms have fees as well, but they are minimal in comparison to banks. Be sure to ask what the cost of a factoring service is and how the costs are calculated. Some firms have set fees for the value of the advance while others adjust fees depending on how long it takes for the AR to be paid by the customer. Are there additional or hidden fees? Some firms may charge for the application and its filing while others provide the application free of all charges. Is there a charge for accessing your account once funds are advanced? There shouldn’t be, but some firms hide this and will sneak it in later. Don’t be afraid to ask about fees; it’s your business and your finances that are being juggled here, so be confident in where you stand before going forward.

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