Waiting to get paid has to be one of the most frustrating things business owners endure. Businesses with long payment cycles, lumpy cash flows or seasonal business can particularly relate. Some clients are known to be slow payers — think corporate and government clients — while others are overly insistent on generous terms. With accounts receivable financing, your business doesn’t have to stall operations waiting for those cheques to come through. You can use factoring finance to convert these invoices to working capital which you can use to pursue other company interests. For instance, you can hire new employees, expand your operations, or you can just use it to run the business.
What Is Factoring Finance?
Factoring finance refers to a situation where a business sells its accounts receivable to another organization (the factoring company) thus freeing up the cash held by their account debtors. The main purpose of factoring is to raise working capital and cater for business expenses, expand sales or cover payroll. With invoice factoring, companies get to turn their current, unsettled invoices into liquid cash. People use different interchangeable terms to refer to factoring receivables including receivables financing, account receivable financing, and invoice financing.
How Does It Work?
There three parties involved in the process of invoice factoring Canada The factor or the financing company that supplies the cash, the account debtor or the party that owes the invoice payment, and the business that issued the invoice. When a business provides goods or services to a client, they give an invoice. Usually, invoices take long to process and waiting for the payment can cost a company a good deal of funds on missed opportunities.
To avoid this, businesses present the invoice to a factoring company and get cash in return, usually 70-90 percent of the amount owed. When the debtor finally settles the accounts, the business gets a rebate of the remaining amount after the factoring company subtracts its service fee. Here are a few tips to help you choose a good invoice factoring firm to conduct business with:
The best invoice factoring companies will be on the up and up from the get go. Make sure that there are no hidden costs and that all-inclusive fees are easy to determine, if not, move on to someone else.
2. Consider the upfront amount they offer
This is a percentage of the invoice cash value the factoring company is willing to give you. Any amount between 70 and 90 percent of the invoice face value is acceptable.
3. Client confidentiality
Some factoring companies will notify your debtors when you sell the invoices. If your prefer discretion, you should look for a company that offers non-notification factoring.
4. Don’t get trapped by contracts
Some factoring companies like to trap their clients with long-term contracts, which is bad for you and good for them. Make sure that you completely understand what you are signing up for. You may be able to find more information online. FundThrough is a good place to start your research.
Invoice factoring has its perks. However, working with a factoring company can be challenging. Between monthly minimums, hidden penalties, opaque terms, and long-term contracts, some of these companies leave much to be desired in the experience. Be careful!