How a factoring service can save your business
Being your own boss is great until cash-flow problems threaten the survival of your business. A recent study by the U.S bank attributes the failure of 82% of small businesses and startups to cash flow problems. So how do you know if you have a cash flow problem? If your expenses exceed your cash – you have a cash flow problem.
This is where a reputable factoring company can help. If you don’t have enough cash in your business to cover all your bills while you are waiting for your clients and/or customers to pay outstanding invoices, a factoring company can help you meet that challenge. Whilst there some pros and cons to invoice factoring, one has to consider all their options when trying to keep a business afloat during tough times.
How it works
A company that is not able to wait until their clients pay invoices sells these outstanding invoices to a third-party collector or factoring company at a discount. Here is how it works: Perhaps you have outstanding invoices of $10 000. You hand these outstanding invoices over to a factoring company that charges you a fee of 10% ($1000). The factoring company will now immediately pay you 80 – 85% of that invoice less than their 10% fee ($1000). So you get the cash due on your invoices immediately to cover your business expenses – but you just get less of it.
- Look out for weekly fees that your factoring company might charge you. These fees are charged at very little, usually just 1%, for each week that the invoice remains unpaid.
- The factoring fee is set out by the factoring company and is dependant on a couple of things:
- Higher invoice rates will have higher fees and vice versa
- The customer’s credit record will affect the factoring fee
- Your sales volume (helps determine the risk)
- They are two types of agreements that you can enter into that ultimately affect the factoring fee as well. You can choose a recourse or non-recourse agreement for your invoice factoring. A non-recourse agreement warrants a higher factoring fee as the factoring company takes the risk of non-payment by your customer. An agreement with recourse means that ultimately you take responsibility if your client does not pay.