In the business world, you shouldn’t expect it’s always booming. You should consider that there are times when businesses face challenges in their cash flow. And if that happens, that’s when business owners consider different types of lending, like money factoring companies.
However, invoice factoring is a unique service that differs from another financing. It could also be an advance business capital or invoice advance loan. In this blog, you will learn more about the common questions you usually hear about what is a factoring company and how money factoring companies help businesses stand and continue its operation.
What Does Money Factoring Companies Do?
The factoring company specializes in or is known to provide invoice factoring services that involve purchasing the unpaid invoices of a business at a discount. In other words, a money factoring company purchases invoices from businesses with customers who don’t pay immediately instead of businesses for up to three months for the customers to pay.
The money factoring companies get a percentage of the invoice within a few days. With that, the money factoring company will take ownership of the invoices and the payment process. And once they purchase the invoices, they will directly collect from the customer’s business.
How Do Money Factoring Companies Earn?
When businesses factor in the invoices, money factoring companies advance about ninety per cent of the invoice’s value to businesses. And when the factor collects the entire payment from customers, they will return the remaining ten per cent to the business, less the factoring fee. The fee is usually between 1 to 5 per cent, depending on factors like how old the invoice is.
How Do Money Factoring Companies Compute Fees?
They compute fees based on a lot of elements like:
– Amount of Money Factored
Economies play an important role in money factoring companies like any other business. Many of its costs are associated with maintaining and establishing relationships that are fixed in nature. Therefore, the more factoring client utilizes the line, the lower the rates will be.
– Invoice Terms Length
Money factoring companies usually charge higher fees for longer payment term invoices. It usually takes sixty to ninety days, and it’s because they are advancing cash to the business for a longer period.
– Credit Quality of Customers
The customers are the ones who are going to pay the invoices. Therefore, the factoring company should ensure that the customers are good for the money. They usually give better credit that will end up having lower factoring fees.
Tips for Choosing a Factoring Company
Choosing a factoring company can be quite challenging. When you begin your research to find the best factoring company, ask these five questions first:
– How long are they in the business?
– How quickly and frequent will the payments be applied to invoices funded?
– What are the terms, funding limits, and fees?
– How do they going to interact with the customers?
– Where are they going to get their funds? Are they banks or middlemen?
Here are the things to consider when choosing money factoring companies.
– Are Factoring Companies Predatory?
The truth is factoring companies are not predatory. They have plenty of providers. However, invoice factoring could get a bad reputation from customers mainly because of unreliable factoring companies that practice shady tactics. But then, factoring has been around for years, and when they are doing it right with reliability, trust, and transparency, it would be ideal for businesses.
– Factoring Companies to Avoid
As a business owner, you should be aware of factoring companies you feel you can’t trust if they charge additional fees into your contracts, like renewal fees, unused line fees, and monthly minimums. You should see if they are concerned if they were unable to represent your business the right way, especially when collecting invoices from the customers.
So, does it really matter if the factoring company is near your place? Well, it’s no longer necessary as everything could be done via mail or virtually. While you can find a factoring company that is trustworthy and more appealing near you, what’s more important is you find a company that you can always trust, especially since it’s about money transactions.