What is invoice factoring?
Invoice factoring is a type of alternative financing where a business owner (the client) may sell their unpaid invoices to a factoring company for cash. When an invoice is approved then sold, the factoring company would pay the business a percentage of the total invoice amount (the advance amount). The factoring company will collect payments directly from the client’s customer. Finally, once the customer has paid the invoice in full to the factoring company, the factor will pay itself back the advance amount plus the factoring fee due at that time. Invoice factoring is not a loan, it is simply an advance based on approved accounts receivable due at a later date. Ultimately, the advance provided by the factoring company is the business’s money, which they are just receiving faster than they normally would.
When to consider invoice factoring services for your SME
Invoice factoring services are available to businesses that have creditworthy customers, invoices to factor, and need quick working capital. The main reasons some businesses turn to invoice factoring are to get working capital to cover any operating expenses, grow your business, or simply have a stable cash flow. With improved cash flow, a business can make payroll, purchase new equipment, pay suppliers, fulfill larger orders, and more.
Consider invoice factoring services to improve your cash flow.
Does invoice factoring affect customer relationships?
A common concern when businesses consider factoring their invoices is how a customer may react to this new process. Since the business would no longer be directly collecting payments from their customer, the relationship may change a bit. Reassure your customer that essentially the only change is that instead of making payments to you, they will make payments to the factoring company. Everything else should remain the same as it is only a change in the remittance address.
One misconception of invoice factoring is that customers may question the health of your company and choose not to work with you. However, most customers will understand how beneficial invoice factoring can be for a business. It is important to have effective communication with your customers. If they are confused about the process or believe your business may be failing, explain to them why you have chosen to factor the invoice and the minor changes they will face. Another misconception is that the factoring company are debt collectors who will harass them. At the end of the day, a factoring company’s relationship with your clients is just as important to them as they are to you. They want to operate in an ethical and reputable manner to continue working with your business and others. Communication between the factoring company and the customer is key in any factoring relationship.
How to manage the relationship between customers and your factoring company
In order to maintain a good factoring relationship with your customers it is important to carefully choose a factoring company whose values align with yours. Consider how long they have been operating, their business practices, and reviews from anyone they have previously worked with. Healthy customer relationships are one of the most important keys to success for any business. Another way to manage your factoring and customer relationship is to have open communication. Educate your customers on the process, alert customers about the factoring company before they send your customers a notice and ask them about their experience after they pay off their invoice. This will prove to your customers that you are putting in effort to maintain a good relationship with them.
A seamless funding partner: invoice factoring with CapFlow
If you are considering a factoring relationship but you are unsure or are feeling a bit overwhelmed about it, we can help. CapFlow Funding Group offers our partners personalized services and values the relationships we have established with all of our clients and their customers. While redirecting payments from your customers may be new to you, we care about your business objectives and will navigate this change with you. CapFlow does not harass your customers and will always communicate with you, the business, on any issues that may arise prior to contacting your customer.