There are many reasons a business’s cash flow could dry up before the end of the month. When it does, it’s always good to have a backup plan. You can’t always rely on bank loans and overdrafts, but other market finance options like debt factoring can help you reboot your cash flow, get you out of a bind, or secure funds to take advantage of a timely opportunity.
Compare invoice financing strategies to find the best market finance option for your business.
What is Debt Factoring?
Debt factoring is a market finance strategy available to companies with significant cash reserves tied up in outstanding invoices.
Debt factoring allows the business to tap into these cash reserves by on-selling their accounts receivables to a third party.
The strategy gives businesses almost instant access to the cash they can use to take advantage of opportunities, grow their business, or ensure their supply lines don’t get held up with late payments.
Debt factoring is an umbrella term used for finance options like invoice factoring, invoice financing, and invoice discounting.
Compare Invoice Financing Options
Debt factoring is a non-traditional type of finance that doesn’t rely on the bureaucratic process of large financial institutions like banks.
In many regards, debt factoring is a streamlined process that gives you access to cash without long-term obligations like early payment penalties and inflexible monthly repayment schedules.
Here’s what to look for when comparing your invoice finance options.
What Type of Debt Factoring Do They Offer?
A good debt factoring company will offer a range of services so a business can choose one which works for them. There are two main types of invoice factoring available; non-recourse and recourse factoring.
Non-recourse factoring means the factoring company buys the invoices outright but provides a credit guarantee on your customers to help reduce the risk of bad debt or non-payment. If one of your clients does not pay for whatever reason, bankruptcy, for example, non-recourse factoring protects you from the factoring company collecting the outstanding invoice from your business.
A recourse factoring agreement means you will need to buy back any invoices your clients did not pay to the factoring company.
It would help if you also understood the difference between invoice factoring and accounts receivable financing when you compare invoice financing.
Accounts receivable financing means you are borrowing money against unpaid invoices. In short, it’s a line of credit where your outstanding invoices provide the collateral. You will need to make repayments, regardless of whether you collect on the invoices, so you are not protected against any bad debt.
Understanding Credit Approval
Remember, an invoice factoring agreement will not be based on your company’s credit. Instead, it will be your customers’ creditworthiness that will come under scrutiny.
Part of your agreement will include providing consent for the factoring company to perform credit checks on your customers.
This process could put a few noses out of joint, and some of your customers may not be willing. It would help if you understood what the process is, should this eventuality crop up.
Ask about how much time you will have to negotiate with your client before the factoring company drops the account and makes you responsible for the outstanding invoice.
Credit checks rarely create an issue, but it’s always better to know the process before you sign a contract.
What is the Advance Amount?
It’s critical to know how much cash you will have access to when you compare.
Ask About Terms and Rates
When you compare invoice financing options, you will need a good understanding of your responsibilities regarding the terms and rates. In general, these numbers will vary according to the industry you are in, the size of your invoices, and the number of invoices you want to factor.
The invoice factoring company will also consider your customer’s credit history and how long it takes them to pay.
Ask about how the company charges fees: flat rate or variable rate. Flat rate invoice factoring means you will pay an upfront fee for the service. A variable rate means you pay more the longer it takes your customers to deliver on their payments.
Does the Invoice Factoring Company Work with Your Industry?
Many invoice factoring companies specialize in the industries in which they work. However, just because they accept all comers does not mean they understand your line of work.
When you compare invoice factoring options, create a shortlist of options containing only those companies with experience in your industry. Doing this will mean you avoid working with a company that may have unrealistic expectations about your ability to pay on their terms.
Read and Understand the Contract
When you’ve made all the necessary comparisons and have settled on a factoring company you think you can work with, you will still need to read the contract while making sure you understand all the requirements. If you don’t understand anything, seek clarification or get your lawyer to go over the contract.
Not understanding a contract can land you in financial difficulties that could be difficult to rectify.
Just a few of the items you should be clear on include:
- What assets do they include in the UCC filing
- Your minimum monthly payments
- The length of the contract term and auto-renew clause, if any
Every invoice factoring contract will cover specific invoices you are factoring. If you are not handing over all of them, you will need to specify these with the factoring company before agreeing to a contract.
Need Expert Help Comparing Invoice Finance Options?
If you still have questions about your market finance options, come in and talk to the experts at Ignite Business Group. We have been delivering exceptional invoice financing options for many years.
Our company partners with an array of financing companies, so you can compare invoice financing options and quickly find one that will work best for your business. Depending on your industry, you could tap into up to 95% of your outstanding invoices for fast cash flow you can use to grow your organisation.
If you would like to find out more about Invoice Financing for small business call us on 01332 896 020. Or, email us enquiries@ignitebusinessgroup.com to see how we can help your business’ cashflow.
