Debt factoring and invoice discounting are very important sources of cash inflows for the SMEs in the time when bank refuse to provide them loans to keep their business continue. But some risk factors are involved with this type of funding that you should aware before choosing among a lot of factors available. You have to consider both the advantages and disadvantages of factoring. Some tips are shared with you to help you make the right decision about factor.
Tips to Compare Debt Factor Offers
Debt factoring and invoice discounting allow you to increase the money inflow against the outstanding debtors. You sell the invoice to the lender who is called factor. The factor provides you 70% to 80% of the invoice immediately. The management of your sales ledger is taken over by the factor. The factor starts chasing the payment. Some time you are offered to handle your customers yourself. Among different factors available, you can choose the best by following the tips discussed here.
First of all, inquire properly that what kind of service is being offered to you. You don't have bad debt protection. If any customer fails to pay, you have to repay the amount to the factor. If it is non-recourse debt factoring, it will include bad debt protection. Before making a final decision, you should talk to factoring company's sales representative in this regard. Next, you have to inquire the cost of the debt factoring. The charges of factoring are, sometimes, are dressed up in a way to look more attractive. You have to work out their exact cost of factoring you have to face each year. Don't forget to add the discount charges or other additional type of charges.
Next you have to choose the company among a lot of debt factoring companies that you are considering selling your invoice. You should inquire about such companies that whether they are being backed by major organization like brands and banks. If it is not so, don't sell your invoice to such a company. Also see that if the debt factoring company has large number of client. You are required, sometimes, to provide additional security. In many cases personal guarantee is required or factor may charge over your property. You should compare the addition security requirements of different factors.
Sometimes you need to terminate all the process, so you have to consider the termination process and ask about the additional charges if you have to withdraw from the debt factoring company. After getting this basic information, next is to talk to the factoring companies about the service level they provide. You have to look deeper in the services they provide. You can get information by talking to other clients of that factoring about service provided.
Ask the factoring company about the cash availability that you require. This will tell you about their efficiency to collect the cash from clients. It will help you to get benefit from factor as the customers started paying. If factoring company has money in accounts and they rarely use it, you have to be careful as you need cash flows to run your business. You also have to inquire the strategies used by the factor to collect money from your customers.