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Factoring Financing


Factoring can help you get fast cash for your business in exchange for your account receivables. Account receivables are invoices that customers are expected to pay for your business. Instead of waiting for your customers to pay their invoices, a commercial finance company can offer to buy the invoice and give you cash upfront.

How Does Factoring Work?

Sometimes, your customers can delay in making payments. This can even cripple your business or make you lose out on an opportunity to grow your business. Factoring companies can help you get funds to deal with your business emergency. Factoring companies usually give between 70% to 90% of the outstanding invoice to companies. When you apply for invoice factoring, the factor is only concerned about the payment history of the customer.

They will like to know if the customer is trustworthy. Once they establish that your customers are reliable, they will give you the cash. The entire process can take less than 24 hours. The factor will now be responsible for the outstanding invoices. Factoring is not a loan hence you do not need to assume debt for the cash you receive.

How to Choose a Good Factoring Company?

Factoring is a common type of business financing. There are several factoring companies in the United States. However, you will still need some tips when choosing a factoring company. This is because the factoring industry is changing and now you can find online many technology-enabled invoice factoring companies.

  1. Transparency in fees
    When you want to choose a factoring company, look at companies that have made their fees clear. Some companies advertise lower fees but when you get cash from them, you will realize that there are some hidden charges. These charges are sometimes even higher than the initial fee advertised by the company. When you decide to deal with a company, you should ask questions concerning late fees and any other undisclosed fees.You should also check for penalties. If you are likely to fall into situations where you will be asked to pay such penalties, it will be better to walk away. Some penalties are also out of proportion and unfair to the companies.
  2. Avoid contracts that will trap you
    Some factoring companies will try to make you sign long-term contracts on certain unfavorable terms. You should avoid such contracts. If a factoring company gives you contract to sign before factoring your invoice, you should read the fine print well. You should know exactly what you are signing for. You should only sign long-term contracts that will help you to save for factoring fees. Do not sign with the intention of canceling if things get bad. Some contracts feature high cancellation fees and you may be better off not canceling the contract. To be on the safe side, look for several options that do not feature tricky contract agreements.

What is Notification?

Before you consider factoring your invoices, you should understand some basic factoring terms. One of such terms is notification. Many factoring companies operate using notifications. The company will send notifications to customers when you factor your invoices. They will also give them an account number to pay their invoices instead of yours. The factoring company will also notify you when they realize that a customer will make late payments. Using notifications may be a hassle in the beginning but it will not take long for things to work out. In general terms, a notification is a message from the factoring company. Usually, notifications inform about new developments concerning the invoice factoring. It is important to take note of all notifications that the factor will send to you.

What is the Advance Rate?

Advance rate is the percentage of the invoice you will receive from the factoring company. A typical advance rate is 70% to 95% of the value of the invoice. For instance, if a customer owes you $2000, an invoice factoring company will offer you an amount between $1400 and $1800 in cash. You will receive that cash in your account within 24 hours if you and your factor complete the process.

Difference Between Whole Ledger Factoring and Spot Factoring

Some factoring companies will ask you to submit a minimum number of invoices as part of the contract. Others will also request that you submit all invoices from one customer. This method is what is termed as whole ledger factoring. Spot factoring, on the other hand, allows you to decide the number of invoices to submit. With spot factoring also termed as single invoice financing, you gain more flexibility. However, it comes with a cost premium. With spot factoring, you do not need to submit invoices when your business is doing well, and you do not need extra cash. You should read your contract to know the option the factoring company uses. If you are willing to pay extra fees to enjoy flexibility, you can choose spot factoring. You can choose a factor that uses whole ledger factoring if you think otherwise.