Every business owner wants to have the funds in the bank to be able to cover all the costs of doing business in between issuing an invoice and receiving the payment. However, even in the best businesses this can be a real balancing act, and smart businesses consider selling accounts receivables to a factor to resolve this temporary cash flow issue.
Determining if you should engage in selling accounts receivables to a factor does require a bit of consideration and comparison of your options. By choosing wisely, and making a good choice in a factoring service, you can solve the issues with having operating cash on hand and run your business the way that works for you.
At its very basic form, selling accounts receivables to a factor involves the factor agreeing to take on the collection of invoices for a fee and advancing you up to 80% of the cash value of the invoices acquired.
The remaining 20% or so of the value of the invoices the factor holds until your customer pays the invoice. Once the invoice or invoices are paid in full, the factor deducts their fees and forwards the residual balance to your business account.
Minimum Volume Requirements
When selling accounts receivables to a factor, you need to understand the scope of the agreement. Some factors, but not all, required a business to have a minimum volume of factoring or be charged additional fees or a different rate for the service.
Other companies do not have this requirement, and will not charge the company when they terminate their use of the factor. This is an important issue to consider if you aren’t going to need the services of a factor on an ongoing basis, or if you are going to process a lower volume of invoices.
Additional Fees and Costs
Another essential consideration when selling accounts receivables to a factor is the cost or fee structure over and above the rate for the service. Some factors charge application fees, due diligence fees, fees for office work, reports and other services that are over and above the quoted rate for factoring.
Other companies do not charge any additional fees. While they may have a very slight increase in their rate, you can easily calculate the fee for their services as there are no hidden or extra costs to have to worry about.
The key to remember for any business is before selling accounts receivables to a factor know the reputation of the factor and understand their requirements, fees and costs of working with the service.