The advantages of using invoice factoring services
Most businesses look for ways to improve cash flow, but for those that rely on invoicing to receive payment, cash flow can be a particular problem. Factoring—the process of selling invoices to a factor in order to collect a large percentage of their value immediately—can be the solution.
Accounts receivable factoring is not a loan; it is the sale of an asset (an invoice) to another company, which will then collect its value. Usually, invoice factoring services pay 75 to 80 percent of an invoice's value up front, and then remit the remainder, minus their fee, when the invoice is paid. While fees vary depending on the factor, most charge somewhere between 2 and 6 percent of the invoice's value.
While factoring can be more expensive than collecting accounts in-house, it can be a quick and easy way to create cash flow, especially for small businesses or businesses that might have trouble getting a loan. Factoring requires far less paperwork than a loan, and factoring services base their decision on the likelihood that the customer will pay, not on the creditworthiness of the business, so businesses often have access to more money through factoring than they would through a loan or cash advance service. Plus, because factoring is the selling of actual assets, there is nothing to repay.
If your business has high accounts receivable and a lengthy period between invoicing and payment, factoring services can provide you with the cash you need now, helping to keep your operations running smoothly and allowing you to focus on growing your business.
How to Choose a Factoring Service
Of course, you'll want to look for a factoring service whose rates you can afford and which is willing to take on the majority of your outstanding invoices. You will also want to ask for samples of the documents they send to clients, as well as listen to a client phone call or a recording of one, in order to ensure that these communications are friendly and professional. Remember, even though you've sold the invoice to the factoring company, your customers are going to associate them with you, so make sure they will represent you well.
Be clear about your expectations and why you are interested in a factoring service, and look for a service that has experience handling the size and type of accounts you offer.
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