When your business runs on invoicing you know the financial pressure that can accrue. First, you’re negotiating payment terms only to see those same terms ignored. Your employees don’t care that you’re owed money, they just care that you owe them money. If you’ve found yourself lying awake nights trying to figure out how you’ll make the books balance, invoice factoring is a solution. Factoring comes with costs but also benefits. Here are three tips to make it work for you.

1. Determine If You’re a Good Candidate

There are four questions that help determine if factoring will help your business:

1. Are you free of tax or legal liens?
2. Do your customers have strong credit?
3. Do you have trouble collecting invoice payments on time?
4. Do delayed payments impact your ability to pay employees, vendors or utilities?

If you answered yes to the first two questions and yes to either the third or fourth question, consider factoring.

2. Understand the Costs

Factoring comes with some high costs. You’ll sell your open invoices to a factoring company for a percentage of the face value of the invoices, usually between 80% and 90%. Even with a low-cost agreement, you should begin your evaluation of your financial situation assuming that you will lose 20% of your accounts receivable. If this is a one-time situation, with extraordinary circumstances, that may be a cost worth paying for the quick funding turnaround. 

If you enter a longer agreement where you consistently batch and sell your invoices, you need to know that your business can afford the cost of factoring over the long term. Take into account that you won’t have to pay for accounts receivable staff or spend time tracking down open invoices, the factoring service takes over those duties.

3. Compare It to Your Other Options

Yes, selling your open invoices is quick; usually, you’ll have funding within a few days or a week. On the other hand, you are paying for that convenience. If you need cash quickly, a traditional loan may not help but you can look at options like a bank line of credit that may offer better terms and still give you an even cash flow over several years. 

Also, consider how you’ll be using the funds and whether your funding options will limit how you can use the funds. Factoring gives you the flexibility to use the funds however you need to.

When you follow these three tips you’ll be assured that the financing choices you make will be the best for your business health.