Invoice Factoring and Your Business: An In-Depth Look
Potential business owners should educate themselves about funding options. Getting start-up capital for a venture can be tricky, so it is important to thoroughly understand all the different avenues you can take. One popular option is factoring, which is the process of selling your account receivables for quick cash. Learn more about the basics of this funding method to decide if it’s right for you.
A Risky Choice
Business professionals should strive to obtain funding that poses the least risk to their enterprise in case they default on payments. Factoring isn’t as low-risk as other cash flow offerings. Rates for financing might be steep; fees can range from 12-60% APR. When you agree to a contract you’re essentially giving an entity the right to collect payments for your invoices. Your customers are responsible for paying the fees, not you.
Another red flag is that its industry is largely unregulated. Thus, you should conduct in-depth research on a company to ensure it can properly manage funds. Seek out recommendations and check its rating with the BBB to make sure there are no complaints or lawsuits against the company.
Maintain Your Customer Relations
It is also important to keep in mind that you’ll have to notify your customers about their responsibility to pay fees, which might impact your business relationship. Most people do not take kindly to the news that their bank account might be taking a hit. Think carefully how you can let them know about your decision to receive this type of funding without causing anger.
It’s a good idea to handle financial transactions through a gated process, during which customers communicate through you despite their financial responsibility to another entity. This way you can avoid the danger of a factoring company being overly aggressive while collecting payments. In addition, this financing method can also open the door to illegal behavior, such as fraud or Ponzi schemes. If you’re the primary contact you can make sure everything is carried out without any suspicious activity.
Sign a Contract With Confidence
Before entering into any business agreement, you should be certain that everything you’re binding yourself to is truly in your best interest. Avoid contracts with personal guarantees, especially. A personal guarantee requires you to hand off an asset such as a car, home or retirement savings if a customer defaults on payment.
Starting a business can be exciting, but it’s not a venture without any pitfalls. Hopefully some introductory information about factoring can help you decide if you want to utilize this type of funding for your start-up capital.
