Small businesses are often perfect candidates for invoice factoring. The success of factoring hinges on a business’s ability to use short-term boosts in cash flow to accelerate growth. Factoring is ideal to bridge income gaps and cover payroll and new product launches – feats a small business can struggle with if it has to wait lengths of time for customers to make payments. While factoring has advantages for nearly every business, small businesses that do not have the resources to stay afloat during seasonal lags can especially benefit. Here are three tips for making the most of small business factoring.
Read the Contract Thoroughly
Once you’ve done your due diligence and decided invoice factoring is the right financing option for your small business, it’s time to select your factoring company. The factor you partner with can make all the difference in how smoothly the process goes. Researching the ideal company to factor your small business’ invoices is an important step to ensure your success. One of the main items you can’t overlook when choosing your factor is the terms and conditions of the contract. Each factoring company will have different terms in its contract – items you should discuss with the company before making your selection.
Skimming over your contract with a factor can result in miscommunications, money mishaps, and an all-around unsatisfactory experience. Some contracts are long-term while others are a one-time deal. Your agreement may have conditions such as the number of invoices you must provide, while others are more flexible. Your contract will also spell out the fees and rates of the factoring service. Review all these details carefully to ensure you aren’t signing up for conditions you don’t want or paying for services you don’t need. Once you sign the contract, you’ll be legally locked into its stipulations – no matter how unacceptable they are. Your due diligence in the beginning stages of factoring can make all the difference.
Keep Track of Your Factoring Services
Many factoring companies also offer other services, such as payroll services, purchase order financing, debt collections, and cash advances. If you sign with your factor for more than one service, always keep copies of all documents from your factoring company. Request a monthly report of all transactions the factor makes on your behalf, and don’t hesitate to ask about questionable items on your reports. Factoring companies can be immensely helpful to small businesses with day-to-day tasks such as payroll tax payments, but remember – it’s ultimately your responsibility to make sure you pay bills and taxes. Stay in communication with your factor to reduce the chances of a harmful oversight.
Use Your Funds Wisely
Factor funding is not a magical solution that can fix all your small business’ problems. While it can mean the difference between enjoying growth and closing your doors forever, this is only the case when the small business knows when to factor and how to use the funds. Factoring is suitable as a short-term solution to income gaps, such as to fill in for a company in seasonal times of slow business or to finance a new, promising project. Factoring is not a fix-all solution for brands experiencing major financial trouble. That being said, factoring can make a major impact on a small business when used correctly.
Once you receive the money from your factoring company, use it wisely. Factoring gives you the option to use your funds in whatever way you want, unlike most bank loans and other forms of financing. However, this does not mean your small business should take the money lightly. Create a careful plan of how you will use your funds and stick to it. Work with your team to figure out how best to spend the money in order to expand company growth, retain major clients, and make your brand scalable. Always look to the future while factoring your receivables to enjoy long-term success.
