Invoice Factoring 101
If you’re looking for a great way to balance your cash flow against overhead like equipment financing, you need to understand how invoice factoring works and when it’s useful for your business. This kind of factoring, also called purchase order financing, operates by providing you with a cash advance against an outstanding order you still need to fill. This is useful because it allows you to make sure you have funding in place to cover the manufacture or acquisition of the goods in the order, without having to worry about its impact on your cash flow.
Invoice factoring can also be an unconventional way of financing major purchases for a business with no cash flow management needs. It allows you to gain a lump sum advance against the value of the order that can function as equipment financing for any new machines you’ll need to fulfill the order. Of course, knowing when it’s to your advantage to use this kind of funding means knowing how to pick yourself a great provider.
There’s a lot of competition in factoring, so you won’t have a hard time finding someone to work with. If you want to make sure your costs are controlled, though, you need to stay in control. That means avoiding a relationship with financing companies that will try to lock you into a long-term contract. Instead, you’ll want to use a factoring company that deals with each transaction on its own, but that still offers incentives to return customers.
You’ll also want to make sure you have transparency when it comes to rates and fees. If you don’t know what you’ll wind up being charged for your advance, then you can’t really predict when invoice factoring will be your most effective method of equipment financing. You need hard numbers to tell you when this is the case.
Last but not least, you need to make sure you’re not going to get trapped in penalty fees. Sometimes, if your customer does not pay within the expected window, additional penalties will apply to your advance, reducing the back-end payment you receive after your customer pays the factor. In order to avoid this, you need to be judicious about which customers’ orders you finance through this method, selecting invoices that you know will be paid predictably based on past behavior.
If you hold to these tips when you’re screening factoring companies, you’ll be able to find a great fit for your business. All it takes is time and diligence when you research your options.