What will my customers think when I'm factoring my invoices?

As most business have discovered most banks are no longer willing to provide lines of credit for working capital for small businesses that are really in need of funding.  The newer federal policies have scared banks away from providing funding for the companies that most need the help.  Accounts Receivable Factoring has provided some help, but is typically a more expensive form of working capital and often includes contact with your customers along with much higher cost of funds.

If your company growth is limit or stalled out because you’re waiting for payments to arrive then it may make some sense to consider factoring invoices.  It works similar to an accounts receivable line of credit as the factor will advance 80% to 90% of your accounts receivable for a fee that ranges from 1% to 5% of the invoice total.  Often these fees are worked into the business model or just paid out as the cost of growth.  You need to make sure you have enough profit margins when taking a look at factoring as a cash flow solution.  The other major issue with factoring is the factor will want to make contact with your customers to verify invoices and make sure the customer is sending the checks to the correct location (the factor). 

Often the factoring client is surprised to find out that the customers are very use to working with factoring companies these days and understand that factors play a vital role in keeping the cash flowing for small business.  However, sometimes customers do not want to work with factors or refuse to work with factoring firms.  It’s very important to check with your customers in advance and confirm they are OK with the remittance change and some calls from time to time regarding invoicing.  You may find it makes sense to factor only a portion of your accounts receivable rather than all your accounts. 

Factoring invoices is a great way for small business to obtain cash flow help as long as your margins support the cost of factoring and your customers are OK working with a factoring company.  Do not make the mistake of letting a factoring contact your customers without your advance notice or factoring could end up being a disaster rather than a solution.

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