Invoice factoring, very simply put, means that you sell your invoices to a different company, stopping you from having to wait for your customer to make a payment. Small companies often struggle financially when they are waiting for an invoice to get paid, sometimes to the point of not being able to fulfill new orders. Instead, of building up debt or damaging their business by not being able to take on a new order, they can choose to turn to a factoring company instead. Doing this is generally very low cost, particularly when compared to getting a loan. This is also due to the fact that you don’t have to pay for interest and that you don’t have to lose your profit margin either.
Different Types of Factoring Services
There are different types of factoring services to choose from as well. Some people, therefore, turns towards an agency in order to help them find the service that is most suitable to their needs. However, with a little bit of research, you should be able to find the type of invoice factoring company that is right for your personal needs. Some of the things that make the companies different include:
- How much of your invoice they are happy to buy.
- Their fees.
- How old the invoice can be.
- The type of creditor they accept.
Very simply put, when you start factoring invoices, the company will purchase a part of your invoice, usually up to 95%, while you wait for the invoice to get paid. Once it is paid, you return the money to the factoring company together with the fee. This is different, therefore, from companies that actually purchase your invoice for less than its value, at which point you no longer own the invoice at all.
You do have to be aware of the fees that the factoring company is likely to charge you as well. In most cases, a number of factors will influence the cost of the fees. Firstly, the rate you have to pay usually drops as the value of your invoice rises. Indeed, it is not uncommon to find rates of just 2% for very large invoices.
Because there are so many different companies that offer factoring finance, it is hugely important that you do your research. In an ideal world, you would never need to rely on a third party to ensure your finances are in order. Hence, when you do require it, you need to make sure that it costs you as little as possible. Secondly, you will usually need these finances in a hurry, so it is best to find a company that pays out in no more than three days.
A good tip is to find a factoring company before you even need to apply for their services. This way, when you do need help, you don’t have to waste time searching for someone or settle for the wrong company. Perhaps you will never need them, but you will at least know where to turn if a situation does occur.