Factoring has been gaining popularity in recent years as a way to help companies that have cash flow problems. Because of this, interest in this financial solution has been growing quickly. This short article will help you determine if factoring is the right solution for your company. To help you with this, we are going to simplify this process by asking four questions:
1. Are your customers paying their invoices in up to 60 days?
Most commercial transactions are not paid immediately after the services (or products) have been delivered. Rather, the customer pays their invoice 30 to 60 days after delivery. For many companies, offering payment terms when they really can’t afford to, is usually the major cause of their financial problems.
2. Are slow customer payments causing cash flow problems?
This is the most important question to determine if invoice financing is the right solution for you. Are your customer’s slow payment causing cash flow problems for your business? Are they causing you to delay payments to your own suppliers? Are they putting you at risk of missing payroll? If you answered yes to this question, then there is a big chance that factoring will be able to help you. Factoring was designed to solve this specific problem.
3. Do your customers have good commercial credit?
A factoring company will only finance your invoices if they are payable from credit worthy companies. Companies are considered credit worthy if they have a long track record of paying invoices of similar size to yours in a timely fashion. Usually, factors will verify this by getting a commercially available credit report on your customers. Having credit worthy customers is the most important requirement to qualify for factoring, since your invoices are what backs the transaction. Generally, invoices from customers that don’t have good commercial credit can’t be factored.
4. Is your company free of major problems?
Qualifying for invoice financing is relatively easy, and definitely easier than obtaining other forms of business financing. To qualify, your company needs to be free of any serious problems. This means that is must not have major unpaid tax liabilities or legal problems.
Obviously, determining if factoring receivables is right for your company takes more that answering four simple questions. It requires that you review your financial situation along with your expectations of future growth, and determine if it is the right solution. However, if you answered “yes” to these four questions, there is a very good chance that it will be the right solution for you.
Disclaimer: This article does not intend to give legal/financial advise and should only be used for information. Please consult a professional if you need financial/legal help.