Invoice factoring is a financing solution for businesses. However, business owners should not take advantage of this right away without ensuring it is right for them. There are some factors to be taken into account to know if your business really needs this type of solution. To help you determine if factoring is right for your business, consider the following:
The Type of Financial Issue Being Faced by your Business
Factoring or invoice factoring can help your business if you cannot afford to wait for your invoices to get paid by your clients. Funds are always necessary to keep your business floating. You may need them to meet your orders or to have money for your business expenses.
Availability of Profit Margins to Cover the Factoring Cost
While factoring can provide financial benefits, it has some cost involved which tends to vary based on your invoice diversification, sales volume and the credit quality of your clients. You may be able to benefit from factoring if you have a minimum of 15 percent profit margins.
Creditworthiness of your Clients
The best factoring company in America will only offer their services if your companies have clients with excellent payment histories. This ensures they will pay their invoices on time.
Approval of your Clients
The majority of factoring companies will verify invoices before they produce funds. This helps them in ensuring you have delivered the ordered products or services and that your clients have received them. The verification process will include contacting your clients and informing them of the possible invoice factoring. While some clients may not have a problem with this type of transaction, others may be suspicious about allowing a third-party to get involved in their invoice payments. That is why you may need to explain to your clients in advance how factoring works and how safe they are for you and for them.
Your Company’s Qualification
Factoring companies will purchase your invoices if they are clear of liens. These liens can be created when your company has a previous loan, if it has a tax lien or if you have a lawsuit. Apart from ensuring your accounts receivables are free of liens, factoring companies will buy your invoices if you have a good track record of delivering services or products with minimal to zero issues. Also, these companies will find you a good candidate if you have great invoicing practices.