With a lot of small businesses facing cash flow problems these days, it’s only ironic to find out that many business owners are not familiar with financial factoring or factoring receivables, which was developed 4,000 years ago. Factoring shares some similarities with debt settlement and other financial processes that close the gaps between cash flows. It’s very important for small businesses that are encountering a sudden increase and demand and need to match it by supplying more as soon as possible. It can go by invoice factoring or just factoring; it’s a very important tool that can help save a business from going underwater.

We’ll be giving you a brief encapsulation of the most important pieces of information regarding financial factoring that may prove to be beneficial.

How it Works

Factoring means selling your unpaid invoices to a third-party that proceeds to provide you with 80-85% of the value of the invoice upfront. That third-party then gets in contact with your customers and proceeds to collect the whole due amount. Once the factoring company gathers the money from your customers, they proceed to provide you with the remaining value of the originally outstanding invoice.

How Factoring Fees are Calculated

There is no such thing as a standard calculated fee all factoring companies abide to, there are hundreds, if not thousands of financial factoring companies, and each may offer different rates for their services. You can learn more about the fees and rates of reputable companies by directly visiting their website. The most common fees are two; processing fees, which are usually around 3% of the invoice amount; factor fee, which is typically 1% of the invoice, deducted per week until the due date.

Recourse and Non-Recourse

Some companies do their own risk assessment and factor in “non-recourse factoring”. This means that they can guarantee that they will pay the invoice even in the case of a non-payment issue popping up. Some companies choose to go with a recourse policy, which means that they have the option to ask you as a client to pay the value of the invoice which hasn’t been paid by a customer to them.

What to Avoid

Before you close a deal with a factoring company, you need to put in your consideration some factors that may affect you negatively. After exceeding an agreed duration of outstanding invoices, the interest can gradually start piling up per day at a rate that could reach 0.13% of the fee. You need to make sure that you carefully familiarize yourself with the factoring company terms and conditions. Try to sort your due dates to know the kind of fees you’ll be paying in worst-case scenarios.

Sifting through thousands of finance factoring companies is no easy job, and if your schedule is tight, it’s an overwhelming task. An educated and careful choice can go a long way in helping you save money and producing a stable cash flow. Look online for social media pages and testimonials that can backup the reputation of the company you are considering. When factoring goes smooth, it enables you to give your business a significant boost.