How to Choose the Right Cannabis Factoring Company

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Contributor, Benzinga
March 21, 2023

Your business would never succeed without your customers. But what happens when they fail to pay their invoices? According to the Rochester Institute of Technology, the average small to midsize business held $84,000 in unpaid accounts receivables. 

An invoice factoring company can help you reclaim at least a portion of this revenue, which can provide a reliable source of cash flow for your cannabis business.

What Is Cannabis Factoring?

Invoice factoring is commonly used in a variety of industries. A factoring company will purchase your unpaid invoices at a reduced price. You’ll receive less income than if your clients had paid in full, but something is still better than nothing.

How does the factoring company make money? Simple. They’ll attempt to reclaim the debt from your clients. In some cases, the company will absorb the unclaimed debt. But in “recourse” factoring, the factor will require that you buy back unpaid invoices — or replace them with one of equal value.

How Do Cannabis Companies Benefit from Invoice Factoring?

The single greatest benefit of invoice factoring is receiving payment for unpaid invoices. Granted, the IRS allows businesses to write off bad debt on their annual income taxes. However, this deduction requires that companies demonstrate a clear record of attempts to reclaim these debts. 

Additionally, a factoring agency will provide much-needed business cash flow when you need it most — right now.

8 Top Considerations for Choosing a Cannabis Factoring Company

Cannabis factoring companies are not all the same. Here’s how to choose a factoring company that aligns with your business.

Identify Your Needs

First, determine whether invoice factoring is your best option. Retailers might only have a few late or unpaid invoices, which might not warrant a contract with a factoring agency. But a cannabis grower and supplier might benefit from a factoring service to collect invoice payments from other cannabis B2B customers.

Do Your Research and Compare Companies

Examine each cannabis factoring company carefully. You’ll want to choose a company that has experience in the cannabis industry. But you’ll also want to understand the process these companies use. Will they require a long-term contract? What percentage do they charge? Do they provide recourse or non-recourse factoring?

Consider Their Reputation and Track Record

A company’s public reputation can often sway your decision. Does the company have a solid track record of reclaiming bad debt? If not, you could find yourself back in the same position as when you started — or even worse, if you’ve had to pay additional fees and terms. 

You might also consider a company that’s been in operation for a number of years, proving they have the experience to meet your business needs.

Analyze Their Fees and Terms

Factoring companies will charge basic fees for their services. At a minimum, they will charge a set percentage for any invoices they purchase from you, often between 1% and 6%. But there may also be other fees or terms you’ll need to look at. 

Most importantly, determine whether this is a recourse or non-recourse factoring company. With a recourse factoring company, you’ll be expected to buy back any unclaimed invoices, which may not be desirable.

Check for Additional Services

Some of the best cannabis factoring companies provide additional services and support. One of the most important services is the opportunity to integrate with your accounting software, providing a streamlined way to manage your invoice payments. Some may offer additional accounting services, though this service will likely come with an extra charge.

Ask About Its Support System

What kind of customer service and support does the factoring company offer? Ideally, you’ll want a U.S.-based support center that allows you to contact them via phone, email or a live chat feature. This feature ensures you have greater visibility and control over your business finances, even after turning over your invoices to a factoring agency.

Read Reviews from Other Customers

Sometimes, the best place to find information about a company is from its former clients. Customer reviews can provide insight into a company’s reputation and reliability. But don’t be quick to trust high scores for companies that only have a handful of reviews. Look for companies that have thousands of reviews accumulated over the years, which can offer a more accurate picture of the company’s reputation.

Don't Rush into a Decision

Understandably, you need cash now. But it’s important to consider all your options before committing to a cannabis factoring company, especially if there’s a long-term contract involved. 

You might opt for alternative ways of improving cash flow, such as lowering your overheads, tapping into a line of credit or applying for a business loan.

Factoring vs. Reverse Factoring

Reverse factoring (also known as “supply chain financing”) works a bit differently than traditional factoring. 

In reverse factoring, the buyer helps suppliers finance their accounts receivables by offering better rates and terms than they might otherwise obtain. As a result, suppliers can receive early payments on invoices, and buyers can usually receive a better deal.

The key difference is timing. Factoring relies on obtaining invoice payments once products have been delivered. Reverse factoring allows for early payments, ensuring a smooth supply chain process.

Better Late than Never?

Is invoice factoring the best way to go? For many cannabis businesses, it is. Factoring ensures that you receive payment for your unpaid invoices and keeps cash flowing through your business. 

In other words, late and reduced payments are better than no payment at all, and cannabis factoring companies can help provide the cash flow you need to continue your operations.

Frequently Asked Questions

Q

What are the three services provided by a factoring company?

A

Factoring companies purchase unpaid invoices from your business. They will then pursue your clients to obtain payment, and clients will pay the factoring company rather than your business directly.

Q

What percentage do factoring companies take?

A

The percentage varies between companies but generally falls between 1% and 6%. Some factoring companies may offer introductory or promotional rates for first-time clients.

Q

What are the risks of factoring?

A

Selling your invoices to a factoring agency means you’ll receive less revenue. It also means that a third-party company will have knowledge of your business data. 

About Sarah Edwards

Sarah Edwards is a CBD and cannabis writer passionate about empowering people with accurate, engaging and accessible content about both industries. She has nearly a decade of writing experience focused on cannabis and CBD culture, science and business. Her work has been published on Cannanine and The Hemp Haus.