Things To Consider Before Setting Up A Factoring Company Account
Factoring can be a great way to ensure there are always funds available for your business. We all know how businesses can die away if there is not finance available for the day-to-day activities. But with some businesses giving as much as three months period for their invoices to become payable, it is understandable why some businesses may have shortages of cash. For example, in a freight company, there is a daily need for finances for the fuel, the payrolls, the maintenance, the tolls and duties, etc. However, in this business, the invoice could take anywhere between four to twelve weeks before it becomes due. Hence, if you are starting a freight business, you will be in a severe financial crunch at the outset. You have money due to you, but you cannot use it!
The factoring companies are the best answer for this kind of a problem. Factoring companies will buy all your accounts receivable invoices for a little less than their money worth. They will take your invoices and give you the cash in return. Then the realization of money on these invoices is their responsibility. They will do everything necessary, i.e. they would keep tabs on the customers, call them when the payments are due and even meet them personally. But, the best thing is that you have got your cash immediately, and you need not hound your defaulting customers. Factoring companies are also known as accounts receivable companies.
It does indeed seem the best option for a company to start a factoring company account. There are very few things you can lose when you go ahead with such a financial provision. But, before signing on the dotted line, there are just a few things that need to be borne in mind:-
- All accounts receivables companies will deduct some part from your total invoice due for their own services. However, you must see how much this amount is. Typically, they must pay you between 90 to 97% of your invoice due amount. Any company that gives you less than this must be doing so if your credit payment history is bad. But if your credit history is good, you should also get a good cash advance.
- The time limit within which the advances are made is also important. Accounts receivables companies must not take more than 24 hours to make their cash advances. Any company that takes more time may not have the funds itself to provide them to you. You might do well to look for another one.
- Is your factoring company providing you with tips on how to associate you with your clients? Many of these cash advance providers will give you guidelines on how to ensure you get your invoices paid to you in time. They will counsel you so that you do not get stuck up with delinquent invoices in future. You must see what kind of support you will get from the provider you have chosen before you set up a factoring company account with them.
- It is not good to enter into long-term contracts with these accounts receivable financers. The wisest thing is to avail of their services when there is a cash requirement in your business, but then you must sign out. The reason is that you are losing some amount of your invoices when you are taking their services as their fees. Only if you feel that chasing your defaulting customers is too much of a burden on you, then you can decide to continue with the services of accounts receivable financers.
- Accounts receivable financing companies must not take a lot of time in paperwork. Generally, these companies provide their advance after only a brief look at the payment history of your company. If your clients have been paying you regularly in the past, there is no reason why the accounts receivable financing companies should delay in providing you cash advances.
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