Steps involved in Invoice Factoring

You can deal with slow paying invoices using three ways. You can wait until your customer pays, you can ask your bank to finance your operation, or you can decide to go for invoice factoring companies. The first two steps are better suited for larger companies that have a huge amount of cash lying in the bank. Asking for banks to finance your operations waiting for your invoices to be paid can be a daunting task for small businesses. Since the 2008 economic recession, banks have implemented procedures that make it difficult for smaller businesses to acquire finances. These companies are left with no option other than turning to factoring companies that buy their accounts receivable at a small cost.

Steps for Factoring

There are many benefits associated with factoring. Before getting into these details, it’s important to know how a factoring company goes around buying other companies’ invoices. On a normal day, the purchase consists of two parts or installments. The first part consists of 80 percent of the receivables although this may differ from one company to the other. The second installment, usually 20 percent is paid when the client honors their invoice.

The first step in factoring requires you to submit the invoice to be bought by factoring companies. Upon receiving the invoice, the factoring company sends you 80 percent of the invoice worth. You then wait for 60-90 days when the client honors their invoice. Once the transaction is complete, the factoring company will pay you the remaining amount.

Looking for the best company

Like any other business related activity, factoring requires you to be keen to avoid been played. So do your due diligence. Look for the company that suits your needs preferably one that specializes in your industry. If you are into construction, choose the company that has a long history serving clients in the construction industry. This ensures that you get rid of hurdles that may result due to misunderstandings. This is then followed by establishing a factoring account where the cash will be deposited. This is the most important part as it requires you to look into your contract as well as legal documents. If you are afraid of any exposure, you can hire a professional attorney who specializes in such agendas. However, keep in mind that the factoring company must do its due diligence and at the end of the process send a document called UCC statement. The whole process cannot take more than five days. At most, it’s been known to take a week to establish a factoring account.

Who is Suited for Factoring

Not all companies are suited for factoring. However, institutions that should consider factoring include turndowns, startups as well as institutions with underperforming banking relations. Also, institutions that cannot acquire a bank loan for one or two reasons can qualify for factoring. But why should companies consider factoring? Well, it’s for many reasons. They may need cash to pay their employees or cash to pay for products that cannot wait for 90 days.

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