There are a few ways to access working capital when your business is busy, but your available capital is low. Factoring is unique because it involves discharging your outstanding invoices, allowing you to move on from them. The result is capital with zero debt overhead, a lot of administrative work, and the risk of payment default getting offloaded. Your small business can streamline to focus on core operations and cash-earning services. Getting started is easier than you think, too, because while this is not a loan agreement, there are quite a few similarities between the two application processes.
Step 1: Collect Your Invoices & Payment Histories
Your total income is not the biggest factor, nor is your outstanding debt. What matters is the total value of your invoices and your customers’ payment histories. If a financing company can count on your invoices to get paid relatively quickly, it is easy to offer you a great deal. That means you need payment ledgers that show when in the last year invoices were paid, as well as the invoices for delivered but unpaid goods and services. It doesn’t matter if some invoices belong to first-time clients if your regular customers have a good track record.
Step 2: Be Responsive to Ongoing Communications
Factoring involves several rounds of back and forth because approval tends to come tentatively based on your numbers. Once the service provider knows the deal looks good, a request for further documentation with specifics should be forthcoming, and you might also have a chance to haggle a bit on costs if you are prompt with new information and you know how to present it. The faster you respond to requests, the faster the deal can close. Established customers that reply within an hour or two can often close a deal in less than two days.
Step 3: Notify Your Customers
You need to let customers know where to send payment once the factor takes over, and you also need processes for forwarding any payments mistakenly sent to you. This is one of your responsibilities under a standard factoring agreement. Be aware that some customers might perceive a third-party payment collector as a possible sign of account delinquency. Make sure your communications about the correct payment recipient emphasize that this is for your administrative benefit and does not reflect the standing of any accounts. That way you avert any possible customer anxiety.