Purchase Order Factoring – Choose the Company Carefully

Purchase Order Factoring – Choose the Company Carefully

Looking at your records, your business is doing very well. You've got a good established client base and orders are on the rise. In fact, it's time to do some expanding but you just can't figure where the money is going to come from. It may be time to cash in on your biggest assets – your accounts receivables, invoices and other outstanding debts. Purchase order factoring could very well be the answer to this quandary, but you should take this step carefully.

Steps to Purchase Order Factoring

Just as there are unscrupulous lenders out there, you'll also find some unscrupulous factoring companies. The first and most important step as you're considering factoring is to start looking into purchase order factoring companies early and take time to get your questions answered. If you wait until cash flow is a serious problem, you may be tempted to take the first offer to come along – and that could be a serious mistake.

One benefit of purchase order factoring over a conventional loan is that you're not tied to a regular payment. You can get the immediate cash you need by simply "selling" invoices and cash receivables. But don't lose sight of the fact that you're tying yourself to a long-term relationship with the factoring company. You'll probably be asked to sign a contract – a year seems to be the norm. For the duration of that contract, you can't factor with any other company and you could be charged a fee even if you go out of business and don't factor anything at all.

Remember that your customers are going to be affected by your choice of a factoring company. Here's how it works. You'll typically produce an invoice and send it along with all supporting documentation to the purchase order factoring company. The factoring company will then send the invoice to the customer and the customer will be instructed to pay the invoice amount to the factoring company.

Depending on the terms of your contract, the factoring company may then take steps to collect any outstanding invoices that aren't paid by the due date. These steps could impact your standing with those customers – especially if the factoring company takes a hard stance and sends nasty notes to customers who haven't paid on time. Some factoring companies may even take steps toward formal collection very quickly.

Possible Fees From Purchase Order Factoring

On the other hand, the factoring company may be charging you a fee based on the amount of time it takes to collect from the client. If the purchase order amount presented to the factoring company was $1,000, the factoring fee may be $10 for every ten days the customer hasn't paid. In that case, you'd probably want the factoring company to send out some sort of reminder when the bill reaches 30 days, but the factoring company may be content to sit back and let you rack up the fees.

The contracts for purchase order factoring (and other types of factoring) are complicated, and filled with details. Read it all and be sure you understand how the process will work, what your duties are, and how your customers will be affected.