What is an Invoice Factoring Company?
You may have heard of the concept of factoring, but might wonder, “What is a factoring company?” “What do they actually do?” “Are there different kinds?”
A factoring company is a business that purchases another company’s invoices. Basically, a factoring company offers invoice factoring (or accounts receivable factoring) services to companies of a variety of sizes.
Working with factoring companies is a popular financing solution for businesses that have cash flow issues due to slow-paying customers, seasonal highs and lows or rapid growth.
One important aspect of a factoring company to understand is that businesses don’t borrow any money from a factor. Instead, they are simply advanced their own money ahead of time since it’s their invoice.
Why Would a Business Work With a Factoring Company?
Working with a factor company provides businesses with cash quickly, usually within 24 hours. Because it is so fast and simple, B2B (business-to-business) companies find it to be a great funding solution for unsteady cash flow.
Businesses with credit issues also look to factoring as a solution. Because your funding is based on outstanding invoices, factors look at the credit history of the businesses your company invoices, not you. Factoring companies approve businesses more easily than a traditional bank loan, there aren’t any long-term contracts, no debt is created and the fees are low.
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What Industries Do Factoring Companies Work With?
Invoice factoring is available for a wide range of industries, including the following:
And Others
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Factoring Agreement Mistakes to Avoid
1. Not Reading Everything
A factoring contract isn’t the most exciting document to read, but it’s important to actually read and understand every detail. And no, skimming does not count.
It might even be beneficial to have a trusted partner also read the document to make sure you don’t miss any important details.
Make sure you’re specifically looking for any type of added fees and be sure to ask the factoring company why they’re part of the agreement.
2. Not Understanding Requirements
Many factoring agreements will have a monthly minimum requirement. Make sure you know what your amount is, if you have one, because you could be penalized if you fail to meet the terms of the contract.
In addition to minimums, know what the penalties are if you fail to meet specific terms.
3. Not Knowing how Factoring Companies Interact with Customers
Since the factoring company you’re working with will be in charge of collecting payment from your customers, you’ll want to understand how they do it.
What does the factor do if a customer is late on a payment? How do they follow up?
These forms of communication are important because they reflect your business as a whole.
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