How Can Invoice Factoring Help Your Business?
Invoice factoring is a method businesses use to gain access to immediate cash. In this process, your business sells invoices to companies at a discounted price. Once the purchasing company owns the invoices, they are responsible for collecting payment from your customers.
What Industries Use This Way of Financing?
Many organizations use this tactic to maintain adequate working capital. Some fields that utilize this means frequently include:
- Government contractors
- Advertising companies
- Transportation services
- Staffing businesses
- Media companies
However, any operation that sends invoices to its clients can benefit from this funding option when cash flow is inconsistent. It gives you the ability to cover daily costs without having to wait for customers to pay.
What Is Recourse Factoring?
A recourse agreement states that you must purchase the invoice back from the buyer if your customers do not pay. This arrangement could affect your available funds if you have to buy back unpaid invoices. You often have options for handling this situation, such as:
- Paying the total through smaller installments
- Replacing the bad invoice with a new invoice of similar value
- Using the reserve percentage you previously withheld
What Is a Non-Recourse Arrangement?
With this type of financial contract, the invoice factor can not force you to repurchase invoices customers do not pay. Traditionally, this meant that the company buying the invoices had to absorb the costs of unpaid bills. However, modifications have changed the way this works for most arrangements made today.
Some things to consider with non-recourse contracts include:
- You do not have to buy back invoices if your customer declares bankruptcy.
- You are responsible for invoices that your clients dispute.
- You typically have to repurchase bills from patrons who are forgetful or slow to pay.
- You can reduce your risk if the purchasing company takes on collection services for your business.
- You likely have to pay more for non-recourse agreements.
Which Arrangement Is Best for Your Business?
The best choice for your organization depends on many factors. There are pros and cons to both options. Consider the elements carefully before you decide how to set up your agreement. When you make a non-recourse arrangement, it is vital to understand which conditions the contract covers and which it does not take on. Sometimes the terms are not worth the increased fees.
The most crucial component is finding the right partner for your business. Ensure the company is willing to work with you when clients do not pay, so you are not left with a void in your working capital.
When funds are low due to seasonal changes or other revenue fluctuations, invoice factoring provides you with an influx of cash to cover your operational costs.
