Proper cash flow is what keeps a business running. So when there is low cash flow, the business operations may be brought to a standstill. This is usually due to the unpaid invoices. This is where accounts receivable comes in.
Simply put, accounts receivable factoring involves selling your accounts receivable to a factoring company for a certain percentage of the unpaid balance. If you are in need of quick cash to run your business, accounts receivable factoring is the ideal option.
If you are considering factoring your accounts receivable and you are wondering how you can make the most out of it, you are in the right place. In this article, we give you tips to help you leverage accounts receivable factoring. Let’s delve into them.
- Determine of factoring is ideal for you
First things first, before you even go ahead and look for a factoring company to sell your accounts receivable, you need to determine if your business will benefit from accounts receivable factoring. While factoring can help most businesses regardless of their size and industry, it may not be an ideal option for some businesses, especially those that do not receive invoices from clients on a regular basis, or if you have any existing liens on your invoices. Factoring generally favors some businesses more than others. You can benefit most from factoring if you are into freight, services, manufacturing, and wholesale.
- Get organized
Once you have determined that factoring will indeed benefit your business, the next thing you need to do is to get organized. You need to get your accounts receivable in order. You need to find out which of your customers are having outstanding invoices, if they are already past due, and the amount of money you have tied up in your accounts receivable portfolio, the best way to do this is by getting organized.
- Understand how the factoring company you have chosen handles unpaid invoices
One of the most important things you need to pay attention to when it comes to factoring is how the company handles unpaid invoices. There are two options for this.
Recourse factoring: where your business will buy back any unpaid invoices that the factoring company is unable to collect from your clients.
Non-Recourse factoring: in this case, the factoring company assumes most of the risk of unpaid invoices. This helps protect your business from non-payments. It is best to choose a company that uses a non-recourse method because they will take credit risk if your customer fails to pay your outstanding balances.
- Understands the company’s fees
You should also ask the company about their pricing and fees involved. The pricing of the company depends on factors, such as your industry, your client’s credit scores, the average invoice value, the number of invoices you want to factor, etc.
Some of the fees involved include due diligence fees, maintenance fees, monthly minimum fees, money transfer, etc. So you need to research all the hidden fees and see if you are comfortable working with the factoring company.