Finding the Right Invoice Factoring Company
Now that your company has decided that factoring off your accounts receivable is a good idea, it is time to find the right factoring company. Some items to consider are the way they treat your customers, the amount they pay upfront, and the overall servicing fee.
As a brief recap of how factoring works: Companies sell goods or services to customers. These companies don’t always require a cash payment and so they end up with receivables from their customers. The company can sell these invoices or receivables to a third party Factor. The Factor pays a percentage up front, usually somewhere around 75 percent of the face value of the invoice, and then remits the rest when the Factor collects from your customers. The Factor also charges a fee, usually around three percent. This fee covers the collection process and the fact that they forwarded you money.
Once you understand the process of factoring, it makes it easier to see what to look for in an invoice factoring company. First, you will want to see how much the company offers for your initial payment. If your customers are safe enough, meaning they have a good payment history, then it is not unheard of to receive 80 to 90 percent of the invoice face value at the initial disbursement. However, this payment will vary depending on the risk of nonpayment by your customers.
One item that you will want to pay special attention to is how the Factor will deal with collections. If your customers usually mail in payment then you will probably have to notify them that you’ve sold their receivable and you or the Factor will need to provide them with the new payment address. Customers can feel turned off by the fact that they are no longer working with the company they thought they were. Make sure to work out an arrangement with the factoring company that will ensure a smooth transition for your customers, otherwise you might never see any of them again.
Along a related line of thought you will want to make sure that the factoring companies you work with will treat your customers how you want them to. For some companies where the customers always make the payments this isn’t a big deal. However, if some of your customers don’t pay on time a Factor may not be as lenient with them as you are. This means they could turn them over to a collection agency or worse. Make sure to find a company that will treat your customers how you want them to be treated.
Selling receivables can be a great way for a company to improve their cash flows. However not all Factors are created equally. You’ll want to find one that will treat your customers right, make a solid first payment, and not kill you with fees. Find out more at ClockWork Accounting.
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