Fluctuating production costs, late customer payments, economic slowdowns, and increases in payroll can all present serious challenges to small businesses and start-up companies. In the past, entrepreneurs sought reliable small business financing through small business loans from banks. However, times have changed, and banks are no longer as stable as they once were. Additionally, small business loans have become very hard for small businesses and start-up companies to obtain as they are costly, require extensive collateral, and are only available to those applicants with outstanding personal and business credit.
What is Accounts Receivable Factoring?
Accounts receivable factoring services are different. Sometimes referred to as “invoice factoring,” this form of small business financing does not create debt, nor is it dependent on business owners’ credit history or collateral. Factoring approvals are based on the creditworthiness of a company’s customers and the value of their associated invoices, making invoice factoring ideal for start-ups and small businesses.
Accounts receivable factoring (or invoice factoring) is a relatively simple process. In this process (sometimes simply called “factoring”), the factoring company purchases its client’s outstanding invoices at a discount, provides funds to the client in a short time period, and then helps collect payment from the client’s customer (s). Essentially, the factoring company purchases the accounts receivable from a small business, providing funds up front to that company. The small business then has the capital needed to maintain workflow while the factor collects on the purchased invoices.
Choosing an Accounts Receivable Factoring Company
When choosing an online accounts receivable factoring company to provide small business financing, there are several items to consider. Online factoring companies vary significantly in what they offer and how much they charge, so it is important to take the time to choose wisely.
As well, when choosing an accounts receivable factoring company online, it is important to be aware of hidden charges or upfront fees. Some of the fees charged include application fees, account maintenance fees, financing fees, same day financing fees, set up fees, origination fees, account termination fees, postage fees, credit report fees, and other fees. Reputable companies typically offer invoice factoring services with no set-up charges for new clients and no upfront costs; essentially, the better firms will not charge their clients anything until an invoice is actually factored.
Look at the length of contract that the factoring company will require from you. Many of these factoring companies will tie you up into a long term contract, and charge you huge fees to get out of the contract.
The most reliable online invoice factoring companies are affiliated with industry protection organizations such as Factors Against Fraud and the International Factoring Association.
Before you commit to an accounts receivable factoring company, be sure you thoroughly understand what it is — and how it can help (and harm your business). Think whether this is the best option for your business, considering the strategic direction and current financial condition of your business.
Recommended Books on Accounts Receivable Factoring:
- Factoring Wisdom: A Preview of Buying Receivables: Short Sayings and Straight Talk for New & Small Factors (Volume 1)
- Factoring Case Studies: Essential Lessons from 30 Real Factoring Clients (Volume 4)
- Fundamentals for Factors: How You Can Make Large Returns in Small Receivables (Volume 2)
- Accounts Receivable Factoring Guide – Definition, Best Companies, Cost Guidance. Expedite Your Business Cash Flows Today
- Positive Cash Flow: Powerful Tools and Techniques to Collect Your Receivables, Manage Your Payables, and Fuel Your Growth
- 8 Little-Known Facts About Receivable Factoring
- Factoring: Alternative Funding Source for Entrepreneurs
- Manage Cash Flow through Accounts Receivable Factoring
- Working Capital is Paramount to Businesses Livelihood
- Evaluating Financing Options for Your Business: Myths and Facts (Part 2)