A factoring company that specializes in small businesses will normally deal with organizations who generate $30,000 or less a month. Since they have access to your receivables, the rates are more competitive than small business loans for bad credit. These clients often include professionals, freelancers, consultants and startups.
The reason why there are factoring companies that specialize in very small businesses is because of the huge difference between conventional factoring and small business factoring. Most small businesses are run by one person and will have minimal members of staff, if any. Oftentimes, they’re more informal than larger businesses and won’t follow as many protocols as larger businesses, especially when it comes to paperwork. That’s why a conventional factor isn’t the best match for a small organization.
Equally, small business factoring companies are often very different to conventional ones, being rather similar to the businesses they offer their services to. In most cases, they’ll be run by an individual with a few members of staff and because they’re entrepreneurs like the people they’re working for. They have a better understanding of what it is they’re doing for the customers. This helps to make them more accommodating, which is why choosing a specialist factoring company is a must if you’re a small business or individual.
Getting the Right Match
Because of the differences outlined above, it’s crucial that you find the right factor for your company. And even if a large, commercial factoring company offers you all the services you need, they might not be the right solution for you. This is because they’ll expect you to follow all their rules and regulations to the dot, which often puts a lot of stress and you and your relationship with the company. Furthermore, you’ll be a very small company compared to the larger ones that they’re working with, which could mean that you’ll get lost among them all throughout the communication process.
So, to find the right factor for your business, there are a few things you can do:
- Look Out for Potential Factors
Start by doing a search for factors that specialize in small companies, using services such as the Factoring Directory. During this stage, it’s important that you look at how they define a “small company” as each may be different. This information may be listed on their website but if it isn’t, it’s a good idea to contact them to find out. Ask for referrals from colleagues and friends before putting together a short list of the companies you think you could work with.
- Ask Them the Right Questions
Once you’ve gathered your list, you’ll need to take the time to speak to each of these organizations individually, asking them some important questions about their company and how they’ll work with you.
Start by finding out whether they only work with small businesses. Ideally, you’ll want them to work with small accounts as well as some larger ones, as this will give you scope if your business bank account grows. If you can find a company who finances invoices that are 5 to 6 times higher than your overall monthly invoice amount then this should be fine.
Secondly, find out whether they charge setup, due diligence or application fees as these are where the costs can soon add up. In a lot of cases, factors for small businesses won’t charge due diligence or application fees and if they do, they’ll usually be small amounts. If the company you’re looking at does have high setup fees, be wary, as this might not be the right solution for your business.
It’s also important that you establish whether they have minimums, which means that you’ll have to submit a minimum number of invoices a month or you’ll have to pay a penalty. Because the majority of small businesses have an unpredictable revenue, most factors who specialize in this area won’t have a minimum monthly amount. However, they may offer you minimums in order to reduce their pricing; so, if you can commit to a certain amount of invoices a month, this could be worthwhile.
Finally, find out whether they’ve got any experience of factoring within your chosen industry. It’s ideal if they do because they’ll be familiar with paperwork, payment patterns, commonly used industry terms and so on. And to make sure they’re not just saying they have the relevant experience, it could be worth asking for references from current companies they work for that are within your niche.
Once you’ve had these questions answered, it’s time to choose your small business factoring company. Try not to make your decision based on price alone, instead, weigh up the pros and cons of each company, looking at which is going to provide the most efficient, all-round service for your business, just as you would when choosing a child care franchise for your son or daughter.
How To Avoid Cash Flow Problems
The ideal situation for a business is to never need invoice factoring services. While this may not be a reality 100% of the time, like when you need to buy new machinery, there are certainly some things you can do to help prevent cash flow problems from ever arising. One of these things is to keep your books organized. Disorganized bookkeeping is a widespread problem among small business owners. However, with all of the new bookkeeping software and accounting software available, there is no longer any excuse. Make sure to keep your books organized in order to avoid cash flow problems that will require you to use the services of an invoice factoring company.
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