Do you need quick cash for your small business? You can approach accounts receivable factoring companies. But what do they exactly do? How do you pick the right one to deal with?
Before you start with the choosing, you need to understand the processes of these companies. Let’s begin by defining accounts receivable. Also called A/Rs, these are debts you need to collect from your customers. Normally, these transactions are business to business (B2B), so your customers are more likely wholesalers. Every time they buy from you, you issue an invoice, which states the amount, items they bought, and the duration of debt.
The collection doesn’t happen overnight. Rather, it can be between 30 and 90 days. For your customers, the longer the better. This gives them enough time to manage their cash flow properly too. The trouble comes in when it’s you that needs a more manageable cash flow. What will you do if you need money to pay off sudden expenses?
This Is Where Accounts Receivable Factoring Companies Come In
When you need money or financing, usually you go to banks and apply for business loans. However, there are disadvantages. One, you may have to apply for a big amount such as $100,000 before you can get the loan. Second, the requirements can be many and hard to accomplish. Furthermore, the rejection rate is high.
Factoring companies, meanwhile, can give you the money you need in as short as 24 hours provided you have submitted all paperwork. The process is simple and easy to understand as well: present your invoice, receive a percentage of the total amount, and then collect the rest minus the fees once your customers paid the invoice.
How to Select Accounts Receivable Factoring Companies
With these in mind, choose your factoring companies based on the following criteria:
Fees – These companies earn money from your receivables through factoring fees, which can be as small as 0.5 percent to as high as 5 percent. Before you conclude the former is better because it’s cheaper, understand the other fees and charges such as penalties. Some of them may also have hidden fees.
Invoices to accept – There are two ways on how factoring companies accept your invoices. One, they get all of your invoices, or, two, they allow you to select the ones you want to factor. The choice depends on you, although the latter provides you with flexibility in terms of the amount you can get and the fee you pay.
Reputation – Part of your due diligence is knowing whether these companies are trustworthy. Read reviews online and offline. Check the Better Business Bureau for any complaints. If there are some, know if the companies resolved these and what they did to do so.
Duration – How soon do you have to wait before you can get the money? There’s no point in choosing factoring–or any loan, for that matter–if you receive the funds after your need.
Upfront Cash – As soon as you give your invoices, the company should also give you an upfront fee. But how much is good? It should be no more than 70 percent of the value.
When you know how to select the best accounts receivable factoring companies, you can maximize this excellent small business leverage.
If you are looking to find the best accounts receivable factoring companies that provide quick funding with low fees, see our tips, reviews, and other useful advice at FactoringCompany.net.