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What is the value of invoice factoring for your SME?

Some small businesses see factoring as a more secure solution than chasing late payments from unreliable customers, but it’s a controversial area that could cause SMEs more headaches than benefits.

Invoice factoring is a form of business funding. A third-party company will buy invoices for around 85% of the cost upfront, manage the correspondence and collection of the funds from the customer, and pay the remaining 15% back to the business at the end of the process. For the service, businesses will pay a fee and interest.

In theory, factoring grants peace of mind that the majority of the costs (if not all of the costs) have been recouped, handing back the power and room for growth. But, SMEs need to be mindful of the terms and conditions that accompany factoring, and that no-strings attached cash isn’t likely if the debt is truly a bad one. Let’s take a closer look at recognisable situations for SMEs, and the pros and cons of bringing in an invoice factoring company.

“My customer’s invoice is overdue and I’ve been chasing with no success. When should I abandon ship and call in the professionals?”

While factoring may light a fire under your customer and encourage them to give more urgent attention to outstanding invoices, it’s a risky tactic from a relationship management perspective. It’s important you know exactly what steps you’ve taken to get the invoice paid

Do you have payment information in your terms and conditions?

The customer should be aware of how long they have to pay after an invoice has been delivered. Has this been made clear to them?

When did you last chase the debt?

Remember to contact the customer as soon as payment is late, even if it’s just one day overdue. If you’ve frequently and comprehensively been in touch, question;

Who is receiving the invoices?

It’s possible your correspondence may not be getting to the right person, or that someone has left at the other end, so copy in your contact or their manager and enquire about the status.

If the customer remains evasive at all levels of management, contacting an invoice factoring company will feel like a simple solution. But, if you’d like to salvage the customer relationship, professional etiquette demands that you advise them that a third-party will be in touch. If it has been a simple miscommunication, shock tactics won’t make for friendly chit chat at the next meeting.

“I’ve found an invoice factoring company to collect the debt, but I’m still not sure it’s right for me. How can I be sure this is the right solution?”

The factoring company’s terms and conditions will reveal a lot about the company you sign-up with. Not only should they should share your values and treat you and your customers with respect, but your agreement should be transparent. Ask the factoring company about their policies on:

Recourse and non-recourse factoring

If the customer is beyond the point of return (they can’t and won’t pay), non-recourse factoring means that the third-party collector will absorb the costs and you won’t owe anything further. If you’re signed up for recourse factoring, you are bound to buy back any bad debt.

Agreed and additional fees

Ensure that their terms are transparent as different companies will require unique payment structures to include; flat fees, a percentage of the total cost, additional charges such as money transfer fees, or even expenses.

Contract length

For example, if a factoring company require a year-long contract, but you only have one difficult customer, weigh up the value of the outstanding debt and factoring expense. If you have a recourse factoring agreement, a short contract can put immense pressure on your business if you have numerous outstanding debts which need to be repaid all in one go.

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