How do you factor invoices? Is it really beneficial for your business to factor invoices? The answer to those questions is, yes. Invoice Factoring is selling your invoice to a third-party financial firm and they will in turn, handle the collections from your customers.
Financial firms that offer factoring services serves these four major services:
Credit checks: This service serves as the first line of defense for a business as they assess the financial status of a possible customer. With this, risks of non-paying and fraudulent customers are greatly reduced.
Credit Risk Assurance: The financial company takes all the responsibility of the invoice they bought. They will not sell back the invoices of customers of doesn’t pay and they will handle the collections as well.
Information Depot: This service is simply storing all transactions made by the customers.
Back Office Support: They also managed collections reports and they call out to customers for collections. They also offer analytical trend reporting.
Businesses of all sizes choose factoring because of these two main reasons: First is to have the cash flow to have increase turnover rate, and the extent of the cash flow to remain at a below average.
Though factoring gives lot opportunities, it does have its own share of risks that can’t be neglected. Here are some the risks involved.
Credit risks: Businesses that have chosen recourse factoring will burden the amount of delinquent payments. And if they chose non-recourse factoring, this will be shouldered by the financial firm.
Fraud: Risks are high for fraud as factoring is easier than getting a bank loan. Fake invoices, rerouted payments, and the likes pose a threat for a financial firm.
Legal Issues: This usually involves out-of-country factoring outsourcing as different countries have different laws and regulations that they need to follow. Taxes are one of the major issues here.
ICT Risks: Information has a risk of being leaked from the inside. Due to a large number of customer data are being processed, some people may take advantage of it. Risks included are: identity theft, stealing credit card numbers, more.
The risk is sure a big downside, but financial firms have ways to counter them. Choose a factoring firm with a good tenure and reputation and remember that you get what you pay for. As you pay a premium price, more services will available for you and this means better security and fewer risks for your business.
Consult different companies and weigh your options. Choose what will make sense for your company.