Smart Business Financing: Factoring Do’s and Don’ts | Behalf
Smart Business Financing: Factoring Do’s and Don’ts
Some companies searching for business financing choose to factor their receivables. After reviewing other methods of financing, they find that factoring is the fastest way to address their financial issues. Factoring is ideal for companies that extend trade credit to customers that are slow to pay. Instead of waiting for customers to pay, they sell their receivables to a factoring company at a discounted rate and get a cash advance. Though it reduces profit margin, they would rather take the loss than wait for their working capital to free up. Finding the right factor for your company is not an easy task. There are factors that trap companies in contracts with unfair terms and bombard them with hidden fees. Take your time and choose a factoring company wisely. The wrong factoring company will charge exorbitant fees that undermine your profit margin more than necessary. Do not get caught up in the wrong factoring company. Your company will end up weaker than it was from the start. This article explains factoring do’s and don’ts to help your company get the best deal for financing factoring services.
Do your research.
Financing with factoring companies can be tricky business. Though factoring companies offer similar services across the board, their factoring rates and fees vary greatly. Search for specific rates and fees on factoring services. Dig for possible penalties, hidden fees and requirements that impact the way you can use their advance. For example, a factoring company can penalize merchants that fail to meet their required minimum factoring volume. This volume is calculated on a monthly basis and if your company does not have enough factoring activity to meet the minimum it may be charged a penalty. The more research you do, the less chance your company has of getting charged ridiculously high fees unexpectedly.
Do consider your customer base.
Factoring is not for every customer and it can strain customer relations. Be aware of your customers’ financial standing, before you submit their receivables for factoring. Factoring companies can refuse to factor certain customers’ receivables if they deem them uncreditworthy. Also consider if your customers will be willing to submit their payments to the factoring company. Not every customer is keen on paying through a third party. Your most difficult customers are probably not a good fit for factoring. The factoring company may not handle them the way your company would. If a customer has a poor interaction with the factoring company, it could damage your relationship with them.
Do complete the application carefully.
Factoring companies are highly selective. They do not want to take on unnecessary risk, so they carefully examine their applicants and their customers. Complete the application to the best of your ability. It will determine whether or not your company is approved and what terms they get. Factoring applications are different than those of more traditional financing methods like bank loans. Instead of focusing on creditworthiness, factors look for the legitimacy of your company, as well as its customers. Put your best foot forward and provide substantial evidence of the fact that your transactions are low-risk.
Don’t sign a contract.
Not every factoring company forces its merchants to sign a contract, which is ideal. Factoring contracts are designed to protect the factoring company not yours. Factoring contracts are like minefields, riddled with dense financial jargon and unfair terms. Often, factoring contracts come with costly cancellation fees to deter companies from breaking them. If you do consider signing a contract, go over it with a fine tooth comb. Otherwise, steer clear of them to avoid a trap.
Don’t factor the wrong customers.
Your company is ultimately responsible for factoring rates and fees, as well as outstanding invoices your customers fail to complete to the factoring company. If you are aware of customers that are so slow to pay, they may risk your standing with the factoring company. Do not factor their invoices. It took your company time to cultivate a loyal customer base. Factoring the wrong customers can damage your relationship with them and increase your accountability to the factoring company.
If you are sold on financing your company by factoring receivables, shop around for the right one. There are factoring companies that are more affordable and satisfy occasional gaps in cash flow due to slow paying customers and trade credits. Factoring might be a larger commitment than you are ready to subject your company to. There are other financing options. Technology has transformed the lending industry to include financing tools that fit almost every business need. Factoring can relieve certain business financial woes, but it also has major drawbacks.
Consider offering your customers financing, instead of factoring their receivables. If your customers do not pay as quickly as you would like, offer them the means to pay instantly. Behalf’s business purchasing line increases the purchasing power of business customers up to $50,000. They can make larger purchases and send payment to your company through their Behalf purchasing line of credit. Customers still get to pay on their own schedule because the line of credit offers payment flexibility. They can pay right away or customize a payment schedule that gives them up to six months of extra time to fulfill payment with Behalf. With no hidden fees, Behalf gives both parties what they want at an affordable rate. Your company does not need to continue to collect outstanding receivables. Financing with Behalf eliminates your collections issues so that the question of factoring becomes irrelevant.
Learn more about how Behalf is transforming the way businesses buy and sell here.