The Do’s and Don’ts of Accounts Receivable Financing

Accounts receivable financing can be a valuable way to get valuable working capital when your business needs it. In this method of financing, your business factors unpaid invoices in exchange for a large portion of the total invoice value upfront. This process enables businesses to stay flexible when unexpected costs arise, such as large inventory purchases. Here are several things to do and avoid when using this type of financing:

DO Choose a Factoring Company With a Trustworthy Reputation

The reputation of the financial institution you choose to work with for accounts receivable financing is of top importance. High-quality banks and factoring companies clearly spell out the terms per invoice, such as what percentage of the invoice’s total you receive in advance, what portion is delivered after your customer pays and how much the factor keeps. If something seems odd to you, choose a different company or do extra research.

DO Investigate Multiple Financing Companies

This is protection both when it comes to avoiding scams and for guaranteeing a good fit for your business. Excellent financing companies can still differ in the terms, percentages, and methods used for accounts receivables, so it pays to take some time to find one that’s right for your business. If you don’t want a third-party calling your customers to collect debts, for example, it may be possible to find a factoring company that offers this type of representative service.

DO Check Out Online Reviews

After narrowing down your list of possible factors, a great way to find out whether a company is a good fit is to investigate customer reviews from other small business owners. If many owners recommend a financial institution, it’s probably because of good service, friendly interactions, easy-to-use accounts receivable financing processes, great terms or fast approval.

DON’T Pick the Cheapest Company

There may be some exceptions where the financing company with the lowest rates is also the one with the best service, but this is often not the case. Because of the importance of trustworthy financing, other areas of accounts receivables can be a bigger priority than rock-bottom pricing structures, such as a trustworthy reputation, excellent treatment of your customers and prompt advances of working capital.

DON’T Sign Contracts Without Reading Them

Good financing companies have nothing to hide. They should be helpful and ready to explain anything you don’t understand. Their goal is to help you grow your business, not pull the wool over your eyes. Request information about terms, such as whether there’s an annual fee for the service, what percentage of the invoice value is kept by the factor and what happens in the case of invoices that aren’t paid.


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