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Invoice factoring services are a great way to generate immediate money for your business. Rather than waiting for customers to pay, factoring services purchase those invoices and advance most of the face value to you. As with most business services, there are some differences in the way that this type of service works, making it necessary to look closely at each program before selecting the one that is right for your company. In particular, pay close attention to the percentage that is advanced on the front end, the factoring fees involved, and what happens if a customer is slow paying a factored invoice.
Since the idea is to generate cash flow from the invoices now rather than later, focus attention on invoice factoring services that offer the highest up-front payment on each invoice batch. Most services of this type will provide an up-front disbursement of anywhere between 80% and 90% of the total face value of each invoice in the batch. While this means that you do receive less on the back end once payments on all those invoices have been received, the higher up-front percentage means you get to use the money now to cover business expenses, which may help avoid various late fees and other charges that you would incur otherwise.
Along with the amount of the up-front payment, consider the factoring fees that are assessed by the various invoice factoring services you are considering. Most will simply keep a fixed percentage of the face value of each invoice batch that is processed. While the percentage varies, plan on the fees amounting to anywhere between four and six percent of the face value for each batch. Ideally, you will be able to find at least a couple of invoice factoring services that offer a higher up-front payment and a lower factoring fee, allowing you to maximize the benefits of using this type of business service.
One important aspect to consider when evaluating different invoice factoring services is what actions each of the services take when a customer is slow to pay an outstanding invoice. Some factoring services will work with you on the collection process, while others prefer to handle the collections effort within their own structure, using their own methods and resources. Keep in mind those procedures may vary from friendly reminders to demands for payment that include threats of further action. Depending on the nature of your relationship with your clientele, this could lead to the loss of customers who simply overlooked an invoice and are highly offended by the collection methods. Before making any type of commitment, ask to see copies of collection letters and get an idea of how their agents will interact with your clientele when making collection calls.
While invoice factoring services are often a very helpful way to manage cash flow effectively, this type of service is not the ideal solution in every situation. Before entering into any type of agreements to factor your company invoices, consider your other alternatives, including the establishment of a business line of credit or a business loan. Making the right financing decision is crucial to the long-term stability and reputation of your business, and the relationships that you enjoy with your clientele.