Everything You Need to Know About Factoring

Factoring is an alternative method of financing that can be used to increase turnover and cash flow in industries where the time to pay invoices can be stretched out to 90 days. It’s a process that involves transferring the legal ownership of customer debts to another company that then collects on those accounts. It can be utilized by businesses that have trouble securing a traditional loan due to short or poor credit history, but there are some important things to keep in mind when considering whether or not to leverage this process.

Will It Be Legal for Your Company?

It is important to consider the kind of business you have and whether or not transferring customer debts is legal for it. For example, a financial securities business that utilizes factoring could be considered a Ponzi scheme. Thus it is prudent to thoroughly research your company and the legal implications before moving forward.

Who Are You Dealing With?

Before you make the decision to transfer customer accounts to another company, it is important to know who you’re dealing with. Consider asking yourself these questions: Does this company have any outstanding lawsuits against it? How long has it been in business? Is it organized and managed professionally? Does it have any customers you can get recommendations from? What is the background of its management team? Does it have good Better Business Bureau ratings?

How Will This Affect Your Customers?

A factoring company that is too aggressive or insensitive can damage your brand or customer relationships. It is important to remember that while your customers’ accounts will be in the hands of a different entity, your customers will associate the way their accounts are handled with you. Thus it is imperative that you plan how this information will be communicated to the customer and how it will affect your image.

What About the Fine Print?

Be sure to thoroughly read and understand the terms of any contract you sign. One red flag is if the contract contains a personal guarantee, which can leverage your personal property as collateral. The best contracts are flexible in negotiating their terms and length, and can be reevaluated month to month.

Depending on your situation, factoring may be the right financing option for your company. However, before you sign that contract and enjoy increased revenue and turnover, you want to make sure that it will be legal for your business, is a deal being made with a reputable company, will be a positive experience for your customers, and doesn’t have any hidden clauses.

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