The Do’s and Don’ts of Factoring

If you’re considering factoring as a way to improve your capital and leverage your accounts receivable, there’s a number of factors you need to consider. Learn more about the basics of accounts receivable financing and keep these do’s and don’ts in mind as you select the best financing tools for your business.

Before you sign up for accounts receivable financing, it’s important to carefully review your lender. Don’t settle for the first option you find, but research your options to find the lender that works best for your situation. An ideal factor is a combination of generous terms and conditions and a trustworthy lender who may assist you with other financial tools in the future.

Be sure to check out the percentage of each invoice that is withheld as payment. While this type of financing doesn’t typically come with interest rates, this rate will help you determine which lender is offering you the best deal on your financing. Of course, there may be hidden fees and other conditions, so ask about any sign-up, processing or general fees that may apply.

Don’t sign up for factoring before reviewing some of your typical clients. Some companies have strict requirements as to which invoices may be factored, so you may struggle to find a type accounts receivable that fits the conditions.

Choose a factor that is flexible and agrees to take over the responsibility of debt collection. As you wait up to 90 days for your invoice to be paid, your customer may have to make a late payment for a number of reasons. Once you choose to factor the invoice, you aren’t able to offer them flexibility. Failure to receive the payment on time could require you to pay back all of your financing. If your lender takes over the responsibility of receiving payment, you won’t have to worry about any of those situations.

When it comes to finding the best factor contract, look for lenders who offer a range of financial products. After a successful factoring relationship, you may wish to branch out and choose other financing options to grow your company. A lender who already knows and trusts you as a reliable factor recipient will be more likely to work with you and offer equipment financing, commercial real estate loans and more. Take charge of your working capital today and use a factor to make prompt payments and solve your cash flow issue.