Choosing the right factoring company for your business
The right factoring company can help to get rid of the frustration that comes with client payments (or the lack thereof) at the end of each month. According to an economic report released by Sage, late payments cost small and medium enterprises an estimated $3 trillion globally per year. According to the report, approximately 13% of all payments made by clients are considered ‘late’.
Invoice factoring is designed to prevent you from falling behind on your financial obligations. Here’s how it works in a nutshell: the factoring company gives you a cash advance of up to 90% on the total amount payable on the invoices sent out to clients. Once the clients pay their invoices, the factoring company transfers the remainder of what is owed to your account, less a small fee.
There is no doubt that invoice factoring promises business owners many benefits. However, it is essential to realize that not all factoring companies are created equal! Here are some tips for finding the perfect fit for your enterprise.
Make sure the company offers whole ledger factoring instead of spot factoring
There are two main types of invoice factoring services, namely whole ledger factoring and spot factoring. Spot factoring is for small businesses who want to factor single invoices infrequently and is more expensive. Whole ledger factoring is often the better option, which involves factoring the entirety of a company’s monthly invoices.
Enquire regarding who shoulders the risk
There is always a risk that clients will not only pay their invoices late but also refuse to pay them at all. It is essential to enquire who will take on this risk when looking for a factoring company. Most factoring companies operate on a recourse basis where business owners take on their own risk and must pay the factoring company back if a client neglects to pay their invoice. Non-recourse factoring companies shoulder the risk of non-payment on behalf of the business owner but tend to charge higher fees.
Investigate what they charge
Rates and fees will differ from company to company, so be sure to compare costs before making a decision. Also, keep in mind that some companies charge flat rates, while some charge variable rates.