Accounts receivable financing can make a useful alternative income source for business owners who find themselves struggling with cash flow. To factor an invoice means that the company owed the money from the invoice sells it to a financial services company. In exchange, the seller of the invoice receives most of its face value minus fees from the factoring company.
Things to Do Before Selling Invoices to a Factoring Company
It’s essential to conduct research to find the best accounts receivable factoring companies in the area and then compare which one can best meet the company’s need for immediate cash flow. Reading online reviews from past clients is an excellent way to gauge whether the company practices responsible lending and the quality of its customer support.
Before signing binding paperwork, the business owner must ensure that he or she understands exactly what it entails. In most cases, the factoring company receives payment on the outstanding invoice from the company that owes it and handles all collection activity as well.
What to Avoid When Choosing Accounts Receivable Financing
While it’s understandable that a company with a cash flow problem wants to save money, going with the accounts receivable financing company that charges the lowest fee isn’t always the best thing to do. Prospective customers need to look at much more than cost to consider terms, borrowing limits, and other important considerations.
If a business doesn’t seem credible, it probably isn’t. Loan applicants must complete their own research via reading feedback from other customers, checking with the local Better Business Bureau for complaints, and asking for references.
A business owner should never sign a document that he or she does not fully understand. It’s up to the company offering accounts receivable financing to make sure the customer knows exactly what to expect from a transaction. If a company seems hesitant to offer information or references, cross it off the short list and contact the next one.