The practice of factoring, also known as "invoice discounting", has grown in popularity in recent times. As more and more companies find themselves in credit crunches due to the global financial crisis, invoice factoring is often discussed as a convenient alternative to traditional bank financing. However, before signing up for a factoring plan, there are a few expert tips about factoring and accounts receivable financing to consider.
1. Learn about the factoring process.
It's important for prospective factoring candidates to learn all they can about how the process of factoring can assist with accounts receivable management. Factoring is a way to get an advance on outstanding invoices that customers have yet to pay. Most companies can get up to 80 or 90 percent of their total invoice value in a lump sum by using factoring. After the factoring company collects on the invoice they send the remaining funds to the businesses after deducting their transaction fee.
2. Read factoring contracts carefully.
While factoring may sound like an attractive way to increase cash flow quickly not all factoring companies offer fair agreements. Some include contract terms that lock company owners into extended periods which can be problematic if the total invoices sent out the following month are lower than that of the previous month. Business owners who are considering factoring should also read the contract carefully to find out exactly how high the transaction fee will be. While most firms offer a relatively low fee such as three to five percent, others may advertise a low rate and then include additional charges that may raise the total cost of the transaction.
3. Watch out for potential customer service issues.
Even if the contract charges are reasonable and the accounts receivable factoring process is clearly explained, companies may have to exercise caution after they enter the factoring agreement. An especially important area where this is needed is the way that the third-party firm interacts with a business's existing customers. Since the factoring company assumes responsibility for collecting on the invoices, representatives from that company will be contacting the business's established customer base and, if the customer service methods are intrusive or harassing, the collection process can endanger further business.
Taking advantage of invoice discounting can be an excellent idea for businesses that need to increase capital without going into debt. However, company owners who decide to do so should still use care to make sure that their factoring agreements are beneficial to their bottom lines.