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5 Tips to Consider before Signing an Invoice Factoring Contract

October 30, 2015, 10:13 AM

Maintaining regular cash flow in business is essential in order to meet several financial obligations including working capital requirements. However, it isn’t as simple as it seems. Late payments from the clients can act as major stumbling blocks when it comes to keeping the cash flowing.

Invoice factoring can be of tremendous help in such challenging situations. It can provide you with immediate cash injection and release cash tied up in outstanding customer invoices. Moreover, you can benefit from the factoring provider’s credit control service as they will collect outstanding invoice payments on your behalf, thereby saving you a lot of time.

Making the most of invoice factoring can help you grab lucrative business opportunities, improve your bottom line, buy new equipment, pay staff wages, and bring your business dreams to fruition.

Regardless of how desperate you may be to acquire the money owed to you, it is imperative for you to be vigilant and investigate the factoring company and their offerings.  Not paying heed to it can backfire and cost your business a lot of money. It is, therefore, best to be aware of the vital aspects related to invoice factoring well before time.

Here are a few essential invoice factoring considerations you should be familiar with to save yourself trouble.

1. Reading between the Lines

Upon receiving the invoice factoring contracts, it is best to review and compare them. A thorough review of the contracts will help you choose the best company for your business. You should make sure to get the needed information related to:

Contract fees
Contract length
Collateral requirements, if any

You don’t want to deal with unpleasant surprises after signing the contract. At the time of reviewing the contract, make sure that it fully discloses the fees that you will be charged. This will help maintain transparency in your invoice factoring transactions. Apart from this, make sure that your contract spells out the termination charges in detail. You don’t want to end up being over-charged for early termination.

2. Choosing the Right Factoring Company

Imagine how it would feel to realize that the factoring company you have chosen doesn’t fit your business needs at all!

In order to avoid such a situation, consider opting for a factoring company that offers month-to-month contracts. This way you will be able to try the services offered by a company for a reasonable period of time. If you find the experience satisfactory, you could enter a long-term contract with the respective company, or switch to another one.

More importantly, when choosing the company, ensure that it is financially sound enough to support your business growth. Also, ask for recommendations and read factoring company reviews before making a choice. Ensure that the company is familiar with the laws related to invoice factoring.

Searching on the Internet can help you greatly in finding the right company in your area. For instance, if you live in the city of San Diego, you can search online for invoice factoring San Diego. This will provide you with a list of relevant results.

3. Taking Care of the Factoring Specifications

Whether you opt for recourse or non-recourse factoring mode, your invoice factoring contract should mention it in depth. You should tread cautiously and read the entire contract carefully.

You need to specify that the factoring should be done on the non-recourse basis if you wish the company to offer credit protection for your receivables when the client fails to pay. Such a specification can spare you a lot of hassle, but may lead to extra expenses.

4. Consulting with an Independent Broker

An independent broker can help you get a better invoice factoring deal and save your valuable time. He/she can determine if there are potential issues and/or hidden charges in the contract. Moreover, he/she can help you find a deal that is tailored to meet your business needs and circumstances.

If you’re absolutely new to factoring, the broker can help you understand various aspects related to it including:

The majority of factoring companies opt for purchasing invoices in two installments. The first one is an advance, and will be given to you when you hand over purchase invoice to the financing company. The second payment, known as the rebate, will be given to you after your customer pays the invoice.

Advance payments for purchasing the invoice tend to be anywhere between 60 to 90 percent of the gross value of the invoices, with 80 percent being about average.

Invoice factoring allows you to get paid immediately rather than having to wait one to three months for your customer to pay you.

The cost of using this service depends on three components - the credit level of your customers, the amount of time taken for your invoices to get paid, and the monthly factored volume.

Usually, you will be required to pay anywhere between 1.5 and 5 percent for each transaction you make.


Invoice factoring can be a brilliant way to raise money for your business. However, it’s important to know about the crucial aspects related to it beforehand. Bearing the above-mentioned aspects in mind will help you make an informed decision, thereby improving the cash flow. Additionally, this will also help reduce administrative overheads. Before signing a contract, give it plenty of thought. Only then will you be able to source the best deal for your business.

Jason Severson
San Diego Business Financing
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