3 Tips for Your First Time With Invoice Factoring

Invoice factoring has provided cash flow management solutions across practically every sector of the industry for decades. It is based on one of the world’s oldest financing mechanisms, and the reason it is so effective is that it allows you to consolidate your invoice payouts to specific dates while turning over the collection process to a third party. As a result, you are able to focus on your core business and avoid a heap of administrative work at the same time.

First-timers sometimes find the application and approval process a little confusing because it is quite different from a loan application. There is more direct communication with the lender and less emphasis on your debt situation. In fact, from the position of the factor, your credit does not come into play. The risk to the factoring provider is in the chance your customers will default. Here are a few tips for navigating your first application.

1. Document Payment Histories Thoroughly

If your customers’ chances of default are the main issue, then thorough documentation of the invoice payment window and each customer’s history with order payments can help a lot. Financing companies and factors will require a certain amount, but it does not hurt to provide a little more if there are any spotty or late payment issues in the recent past. The more you can show that each client will pay, the higher the percentage of face value you can realize.

2. Factor Invoices in Large Batches

Factoring is a risk management game just like any loan or credit product would be. Financing companies that take on payment collection by buying out invoices may allow you to selectively factor just a few big ones, but a wider risk pool is almost always better for your bottom line. The more distributed the risk, the lower the chances the deal will be unprofitable. Even if a few customers default, having dozens of invoices factored together means the factor will still be very likely to profit.

3. Respond Promptly To Requests

Each service provider will require slightly different documentation in an application, but one thing they have in common is the request for second-round information. Once your invoices are reviewed and a tentative approval is reached, most factoring services request proof of insurance, licensing, and regulatory compliance if either of the latter two are applicable.

This helps settle risk management concerns that are not always apparent in the numbers alone. The faster you respond to these requests for information, the faster you can close the deal and get your money.


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