Invoice Loans: 3 Tips to Shopping for an Invoice Factoring Company | Behalf
Invoice Loans: 3 Tips to Shopping for an Invoice Factoring Company
Before you commit your company to any sort of business financing, you need to examine the lender. Invoice factoring is no exception. Most companies that choose to factor their invoices extend trade credits to customers. Though the trade credit generously extends the amount of time customers have to fulfill payment, it opens companies up to significant risk. Trade credits attract slow and non-paying customers. As a result, the companies that extend trade credits tend to accumulate outstanding invoices, stalling their cash flow. They turn to factoring companies that offer advances, or loans, in exchange for their outstanding receivables. They use these “invoice loans” to supplement the shortage in working capital they experience from their slow and non-paying customers.
Though invoice loans are a faster solution than waiting around for customers to pay, finding good invoice loans is difficult; finding the right factoring company to lend one is even harder. Invoice factoring is an expensive form of business financing. It takes time and patience to find a factoring company with fair terms and affordable rates on their invoice loans. Factoring companies operate differently than other lenders. Their policies are strict and they are selective about whose customers they finance and which ones. As you shop for invoice loans for your company, keep in mind the following 3 tips to finding the right invoice factoring company.
1) Look for Transparency
The reason you are shopping for a factoring company is because you want to get the best deal on their invoice loans. The factoring transaction has two parts: the invoice loan and its rates. A simple way to weed out predatory factoring companies from the legitimate ones is to note how transparent they are about the rates on their invoice loans. Some invoice factoring companies advertise low factoring rates to attract merchants, only to slam them later with a bunch of hidden fees. Look past the rates factoring companies lead with and try to get the big picture. You want the full breakdown of rates associated with invoice loans so you can better compare prices.
2) Get Specifics
Before you sign the dotted line, learn the factoring company’s specific policies. Failing to comply with a factoring company’s policies can lead to penalties. You may find that a factoring company has unfair policies and excessive penalties that inhibit your company from carrying out its usual business operations. That is a red flag; you should heed the sign and look elsewhere for invoice loans. Also get details about the invoice loans themselves. Find out just what percentage of your invoices make up the invoice loan. On average, invoice loans cost anywhere from 20 to 40% of the original invoice.
3) Steer Clear of Contracts
Invoice loans are simple enough but factoring contracts are tricky and you should avoid involving your company with one at all costs. Many factoring companies ask merchants to sign long-term contracts to protect themselves from risk. These contracts can lock your company into a trap it cannot get out of. The cancellation fees in factoring contracts tend to be unreasonably high. They also include minimum requirements that penalize your company if its monthly factoring volume is not high enough. Factoring contracts may force your company to use their services when it doesn’t need to. If you must sign a contract, read it carefully and lookout for unfair terms. If you feel hesitant, go with your gut and keep looking.
Even after you carefully examine different invoice factoring companies, you may not be satisfied with the invoice loans they offer. Invoice loans may not be the type of business financing you need. Most likely you are considering invoice loans because you have slow or non-paying customers and your outstanding receivables are starting to accumulate. Instead of financing your invoices, consider offering your customers a business line of credit so they can always pay you on time. Behalf’s business line of credit can increase your customer’s purchasing power up to $50,000. There are no hidden fees and affordable rates for both your company and its customers. Your business customers can make larger, more frequent purchases when they use the line of credit to pay you, the vendor. You get paid within 1 day and your customer can customize their payment schedule and extend payment to Behalf up to six months. The funds on their line of credit replenish as they pay, giving them constant access to working capital.
Learn more about how Behalf is transforming the way business buy and sell here.