Every business needs sufficient funds to sustain its operations. Most times clients take too long to pay for the services rendered and all a business has to prove money owed is an invoice. Waiting for a long time for clients to pay can have the business lagging in so many areas. The business might lose new business ventures since it can’t deliver on its obligations. There are various ways through which businesses can get funding to boost the operational needs pending settlement of the invoices by their clients. Among the ways that have proven to work is invoice factoring. For clarity, this process involves the selling of invoices to factoring companies. This way the business can get the funds it needs without waiting for clients that are taking too long to pay. There are a few guidelines that can make this engagement successful. Here is a simple guide for you in invoice factoring.
Payment of a percentage of the invoice value
Factoring companies usually advance a percentage of the invoice amount to the business pending payment of the invoice amount by the client. So when seeking these services, always know that it’s not the whole amount that will be advanced to the business. This, however, does not mean that the remaining amount will not be paid. This is usually done at a later date after the client has remitted the amount owed to the factors. The business, however, receives the balance after deduction of the factoring fees.
Recourse and non-recourse factoring
As a business, there are times when clients might fail to pay. These are times that a business needs to stay ready. In the factoring business, the business will be faced with two options of factoring. There are the recourse and non-recourse. There is a need to know which plan favors your business. On the part of recourse factoring if the client fails to pay, then the business will be liable to refund the factoring company the money advanced to them. This can be a hard hit for a business that is struggling financially. However, all hope is not lost. The business also has the option where they can choose the non-recourse plan. This one is a bit expensive and it will cost your business more, the good part is that in the event the client fails to pay, the factoring company will write off the debt. It is important however that before the business chooses a non-recourse plan, the terms of engagement are set to clear.
Spot factoring and high volume factoring
Spot factoring gives the business the freedom to choose which invoice it wants to sell to the factor. This way if a single invoice can finance business operations for the rest of the month, the other invoices can be in the business custody pending payment. For high volume factoring, most of the business invoices go to the factoring company. This kind of takes the business’s freedom since it has to let go of most of the invoices. If the invoice is not financially stable, it is important to weigh the pros and cons of both spot and high volume to get what works best for the business. If the business chooses spot factoring, the discount rate tends to be higher than the high volume factoring.
With these guidelines at hand, as a business looking for reliable financing to keep the business afloat, factoring is the best option to take up. The factoring company is always willing to assist as much as possible with details on the terms of engagement. This helps a lot when making a decision that will favor the business.