Obtaining working capital is essential for small businesses to operate and overcome cash flow gaps. But equally important is making an informed decision about which financing provider to partner with.

To help you understand what type of factoring company is right for you, here are 8 golden questions to ask yourself when searching for the best invoice factoring company for your business .

What types of business factoring services do you offer?

When choosing an invoice factoring company, you should consider the type of service your business needs. Do you want to factor all your invoices or do you want to be able to choose which invoices to send for financing? Are you willing to take risks if a customer fails to pay an invoice?

Here are the key discount terms and options you should know:

Spot Factoring vs Complete Factoring

• Spot Factoring – Spot factoring allows for a one-time discount on a single invoice without long-term contracts, allowing for greater flexibility. However, rates tend to be higher.
• Full Factoring – With full Balance Sheet factoring, also known as full factoring, a business is required to submit all customer invoices. Fees are generally lower than spot factoring, but most factors will charge a hefty termination fee if you decide to cancel your contract with them.

Recourse vs. non-recourse

• Recourse: With recourse factoring, business owners assume the risk if their client does not pay the invoice on time. If the client does not return payment for the invoice he sent to the factoring company, he must cover the costs and purchase the invoice back from the factor. Recourse factoring is less risky for the factor and is generally a more affordable option than non-recourse factoring.
• Non-recourse : With non-recourse factoring, business owners will not be liable if their customers do not pay the outstanding invoice. However, fees tend to be higher because the factoring company takes on more risk . Additionally, most non-recourse factors will avoid accepting invoices from their customers who have low credit scores and poor payment history.

Factoring vs. Invoice financing

• Invoice Factoring: Invoice factoring is the sale of a company’s accounts receivable at a discount to a factoring company in exchange for a cash advance. The advance amount is usually 80 to 95 percent of the invoice sold (depending on the relationship with the payer it can be 100%) . Unlike traditional bank financing, factoring provides more flexibility because the cash you receive depends on the invoices you send and, technically, it is a debt-free source of financing.
• Invoice Financing: With invoice financing, business owners do not sell their accounts receivable to the factoring company. Instead, business owners use their accounts receivable as collateral to qualify for a loan. The loan amount depends on the strength of your invoices. There is a higher risk for a small business with invoice financing because the invoices are still the property of the business owner.

What conditions and rates do they offer?

Fee structures for factoring company ranges are variable or flat. As a general rule, the more invoices you discount, the lower your rate will be.

With variable rate structures, also known as tiered rate structures, factors will deduct a small percentage of the bill while the bill is outstanding. This means that the longer your bill remains unpaid, the more fees it will accumulate over time. Although variable fee structures are more complicated to calculate, they can be more cost-effective depending on your business profile because the fee is based on the risk of the account.

With a flat rate structure, the rate remains the same no matter how late the bill is. However, fixed rates are generally higher than variable rate structures. Fixed rates are calculated by multiplying the face value of an invoice by the fixed rate.

So if you have a lot of customers who consistently pay well in advance of their net terms, it is more cost-effective to use a flat fee structure than a variable fee structure. Otherwise, if you plan to bill occasionally, flat fee structures make more sense. It is also important to note that flat rate structures are commonly used for companies in the transportation industry to make accounting easier.

Factoring terms and rates are determined by a number of factors, including but not limited to:

• business industry
• Invoice volume
• Net invoice conditions
• Type of service
• Customer quality
• What industries do the factors work with?

B2B companies with notable clients and longer net terms are excellent candidates for accounts receivable factoring . Companies in these industries are big users of factoring:

• Transport
• Staffing Services
• Manufacturing
• Construction
• Distribution
• Freelancers (i.e. marketing, PR, and creative)
• IT services and software development
• Consultancy

Are there hidden costs or fees?

Some invoice financing companies have hidden fees or penalties. Understand what triggers penalties so you can avoid them.

• Termination Fees: If you sign a long-term contract with a factor and decide to cancel, you may be required to pay a significant termination fee. Cancellation fees can range from 3% to 10% of your factoring line of credit.
• Minimum monthly rates: Some factors require companies to commit to factoring a certain number of invoices per month. If a company does not discount enough invoices, the factoring company will charge an additional fee.
• Maintenance Fees: This fee is charged to keep your account open/up to date with the factoring company. Maintenance fees are generally charged monthly.
• Due Diligence Fees: These are charged whenever the factor needs to verify their client’s background. The factor will ensure that your client has no existing liens, is in good credit standing, unpaid taxes, and more.

What is in the factoring agreement for companies?

The invoice factoring agreement is a financial contract that explains the costs and terms of your factoring plan. It includes general terms and provisions, so it is important that you study and understand an agreement before signing it.

Check the fees and terminology used, such as the minimum annual fee or client limit . Please note that some factoring agreements impose high cancellation fees. Long-term contracts may also require you to advance a certain amount of invoices.

What is the factor advance rate?

An “advance payment” rate is the percentage of the face value of the invoice that you will receive in advance. A fair advance rate is 70 to 95% of the face value of the invoice (Detra – an Intelcost brand – discounts 100% in most cases). For example, if your client owes you $1,000, you should expect to receive a cash advance of $700 to $900 in your account.

How quickly can you get funding?

Some factoring companies (especially traditional factors) can take months to set up your merchant account, while modern solutions, such as Detra by Suplos, can set up your account in less than 2 days and once the account is set up, you can get funds in hours. Online financing companies have made due diligence more efficient through automation . What this means is that modern factors can now verify your customers, their invoices, and any existing liens on your business more quickly and efficiently. Most modern factors can result in funds being deposited into your bank account within hours of sending an invoice, once your account is fully created.

Do they offer good service?

Depending on the complexity of your business, you may want to speak to a financial advisor who can facilitate consultations before, during and after your application. Whether you choose to work with an online or traditional factor, make sure you are assigned a real person on the other side to help you overcome unexpected challenges and ensure you get the right amount of funding for your business.

Are you a good candidate for invoice factoring?

Think about the importance of each of these questions to your business and look for an invoice factoring company that gives you and your business the optimal combination of features, flexibility and terms you deserve. With a little research, you’ll find a partner and deal that offers you the funds, flexibility , transparency, and terms that suit your needs. As a guiding principle, find a partner you want to work with long-term and don’t settle for less.

Detra offers a simplified approach to invoice advance.

Detra specializes in online invoice financing for business owners who want flexibility, speed, and transparent rates and terms. We offer a cash discount, with our easy-to-navigate Dashboard you can receive funds in as little as one business day. Learn more about invoice financing here.

Fuente: Vine