How to Choose an Invoice Factoring Company for Your Small Business

Choosing an ideal company that offers invoice factoring can be a little overwhelming, especially if you are just a small business owner. Nevertheless, making it easier is possible. And with the help of this ultimate guide, you can easily determine how invoice factoring works and how do you choose a company that offers this service.

Understanding Invoice Factoring for Small Business

For small businesses, invoice factoring is one way to produce funds and improve the flow of cash. It works by selling your unpaid invoices to a trusted company in exchange of a cash advance. Typically, the cash advance equates to more or less 80% of the total invoice value, which you will receive in cash in as short as 24 hours. The remaining invoice value will be paid back minus the company’s factoring fees.

Invoice factoring is one way to put cash into the business and is a great option for small businesses as well. Nevertheless, like any funding options, this can have a number of advantages and disadvantages. Hence, it is crucial for a business to weigh these and any other options when it comes to choosing a factoring company.

Benefits and Drawbacks of Factoring

Before choosing a factoring company, make sure to check if the benefits are greater than the possible downsides, particularly for your business.

Advantages of Factoring

  • Help increase the company’s cash flow
  • Minimize your business’ administrative tasks that come with invoice processing
  • Promote business growth
  • Allow you to make purchases urgently
  • Reduce the waiting time involved in cashing in company invoices
  • Offer protection against delayed payment since the factoring company will be the one responsible to the invoices once they have been factored
  • Release you from the stress and possible costs of debt collection
  • Offer invoice payment assurance

Disadvantages of Factoring

Keep in mind that these disadvantages may depend on the business’ nature as well as its outstanding invoices.

  • May have a negative impact to your reputation as a business
  • Some agreements can still leave you accountable in case the customer fails to pay
  • Reduced amount of revenue due to fees

So, after weighing the various pros and cons, is it right for your business? Remember, factoring is not ideal for every business. Nonetheless, it can be a great help and even a lifeline for others.

It is right for your business if you need a quick, flexible cash flow and do not want to deal with processing, collection, and other administrative work involved with unpaid invoices. Yes, there are other ways to raise cash, but most of the time, these methods give you access to cash in a slower pace, and at the same time may not be available for small businesses like yours.

On the other hand, this kind of financing may not be ideal for your business if your clients are unreliable and have bad credit history.

Things to Consider When Looking for a Factoring Company

Once you have determined what invoice factoring is, it is now time to consider the various aspects that you should consider when choosing a factoring company. Here are some of the things that you must look for:

  • Financial regulation. Check if the factoring company is a member of or recognized by a highly prestigious and trusted financial organization.
  • Industry recognition. See if you will find reviews by other business owners who already had financial deals with the company.
  • Specialism. Considering a company with expertise in small businesses can help guarantee that they have better understanding on what your small business really needs.

Apart from the above-mentioned things to consider, you must also check the following factors before selecting a factoring company:

  • The amount of factoring fee
  • What additional fees to pay
  • Whether it is non-recourse or recourse
  • If it is non-notification or otherwise
  • Whether it requires a long-term contract
  • What kind of invoices are allowed for factoring

Depending on the specific needs of your business, an invoice factoring service may vary in terms of quality. What you must keep in mind is that they have different requirements which your business may or may not meet. However, with the proper research and canvassing, it would be possible to find a company that offers the best rates and with the lowest fees.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.