Factoring

Invoice factoring has a bad reputation, and it's time to set the record straight. Factoring can work for your business by providing much-needed capital, fast. Here's why many of the concerns about factoring are more myth than reality.

How Factoring Works

In factoring, you release your invoices to a third party, which then processes the invoices. You sell this outside company the receivables on your balance sheet at low prices; in exchange, they get access to these outstanding debts.

You can then get those debts paid, using a factor, to provide extra cash for your business. This capital is a huge help if you are starting a new project, looking to expand, or simply need working capital to keep running through a lean cycle. Factoring works well for small businesses that do not have a financial department or slow-paying clients. However, two common fears often stop businesses from using a factor.

Squashing the Factoring Fears

Two common fears about invoice factoring are that the third party intimidates your customers and is costly to use. While there is a service charge for use of a factor, it is not unreasonable. The crowded field of factoring companies means you can easily get a competitive price; you might even ask the company you prefer if they will price-match a reasonable price you found elsewhere. This way, you get a quality third party at an affordable price.

Another fear is that the factor will not handle your customers in a professional way. To avoid this issue, be sure to research the factor prior to signing any paperwork. Inquire if the prospective company has references so you can check its customer-service track record. Choose a factor that will be professional and respectful in dealing with your clients so as not to disrupt your current business relationships. Also, ask the factor to make notes of their customer dealings for you; that way, you are kept in the loop with your clients.

Advantages of Factoring

Factoring is considered a respectable alternative to a traditional loan, and brings a number of advantages. You can release a large percentage of funds against the outstanding invoices by working with a factor. When orders are invoiced, you get cash that you can use toward future orders, too.

In addition, you save time by enlisting a factor. Management no longer needs to spend time on outstanding accounts, as this task is given to a third party. Managers can instead work on business goals.

There are many advantages to taking the factoring route. To find a factor, it is as simple as using an online search. You can also ask businesses you respect about which factors they use. You may even find that your customers respect factors and pay their debts quickly when in contact with the third party.