There are many benefits for a business to use factoring, the sale of accounts receivable, to obtain funding. This is very different from traditional financing as it is an advance on the accounts receivable. The factor will then deduct the service fee and provide the cash into the business count, which can be in just hours for established customers. There is no balance to pay back, no interest accumulating, and in some cases no penalty for non-payment.
For any business that chooses the process of factoring accounts receivable, it will be critical to understand the terms of the service. Different factoring companies may have a variety of additional fees, specific requirements for enrolling in the service, and even penalties if you wish to terminate the use of their service.
To help ensure you don’t make a mistake, always be sure to read any and all literature provided by the factoring service. Some of the stipulations you find may include:
* Recourse or non-recourse – non-recourse factoring accounts receivable companies do not charge you if your customer fails to pay. The factor assumes the risk for the payment, which means you will never have to repay. Recourse factoring places the risk on your business. You will be required to pay the factor if the customer defaults except in very specific situations.
* Minimum factoring volume – some companies will require a minimum dollar value of invoices per month or quarter. If your business fails to factor that minimum amount there can be additional fees and penalties or a higher rate.
* Fees – always take the time to read the information on fees and costs to factoring accounts receivable through a company. This should be outlined clearly and concisely.
Top factoring services can be a huge asset to a business. They can provide a continual cash flow for your business without the need for complicated business loans, personal loans or other types of costly funding options. If you decide to take this on, be sure to protect yourself by staying informed.
