Invoice factoring is a financing option that can allow small businesses to access ready cash without taking out a loan or a business cash advance. There are many distinct advantages to factoring – for example unlike other services it is a mid-long term solution that takes into account the natural ebb and flow of your capital, allowing you speedy access to more funds as your business grows and develops. Many companies utilize invoice finance as a way of simplifying their finances by outsourcing their collections. But how does it work, and how do you make sure you’re getting the best possible deal? Read our guide to find out more…

The basics

Invoice factoring involves using your invoices as collateral in return for ready cash for your business. The factoring company will give you a cash advance – usually around 80% of the value of your invoices. They will then collect the invoices on your behalf before paying you the rest of the value, minus a small administration fee.

Getting the best possible deal

The administration or factoring fees are typically between 1.5% and 2.5% of the invoice value. This can vary according to the factoring company you work with, and the services you require. Here are a few ways in which you can encourage your factoring company to offer you a lower premium.

1. Let the factoring company know your grow ambitions

As the cost of factoring depends on the size of your turnover, make sure the factoring company knows your growth plans and commits to a reduction if you hit certain milestones

2. Include credit insurance

Customers who pay late and have poor credit are obviously far less attractive to any company, and often require far more time and effort to collect money from. If you want to use factoring to cut down on the time it takes to collect invoices in-house and reduce the bad debt risk by asking the factoring company to include you on their credit insurance – normally lower cost than sorting it out yourself.

3. Look out for renegotiable terms

The best factoring companies are the ones that are willing to work closely with you and create a tailored agreement that reflects the nature of your business, including changes of circumstance that might require you to scale up or down your funding plan on short notice. Also check if the they have different payment options – separate finance and service fee or a simple one fee.

4. Take advantage of trial periods

Never commit to an invoice factoring agreement that doesn’t offer you a no-obligation trial period of at least 3-6 months. This will allow you to ascertain whether this is the right company to you, and get out quickly, easily and inexpensively if you’re not satisfied.

If you take the time to speak to reputable, fully accredited factoring companies and shop around for a deal that really reflects the needs of your business, you should find that factoring can significantly benefit the way you run your business.

Hitachi Capital is a reputable and leading provider of invoice finance solutions. Winner of the Factor and Discounter of the Year award at the CreditToday Awards 2011.

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