While factoring receivables is a smart way for a business to raise money, it can also turn into a nightmare if a company chooses the wrong factoring company. Beware of dangling carrots; a bad factoring company can cost a small business money, important client relationships, and create instability. When a business is desperate for working capital fast, it’s even more essential they make the proper decision in choosing the right factoring company.
How Long Has the Factoring Company Been in Business?
One of the most important aspects of finding the right factoring company is the amount of time they have been in business. Experience and time spent in a small business specific industry are essential. The more they understand an industry, the smarter and more complex funding deals can be made. Excellent factoring services should have a strong balance sheet and be direct funders. They should be able to offer more sophisticated funding packages, better rates and lower your overall risks while improving the chances of success.
What are the Terms and Rates/Fees of Factoring?
Depending on the Factoring company this can be your only fee or this can be just the fee to cover the factor’s risk and overhead. Make sure to ask the factor when doing your research. This fee primarily covers all of the collections work including the processing of invoices and collection from your customers, the account debtors. It is typically charged based on the total value of the invoice amount you assign to the Factor. For many factoring providers, this fee also covers their cost of funds for invoice financing.
Factoring rates are based on monthly, quarterly or seasonal sales volume or cycle. You will see many Factoring providers tout their no minimums policy. However, these are typically at a much higher rate in the factor’s term contracts. Again, it’s important to ask about the contract terms.
Does the Factoring Company offer Non-Recourse Funding?
Less than 20% of receivable factoring companies utilize credit insurance as part of their factoring package. The non-recourse factoring company must have a strong balance sheet and credit culture to qualify as the large insurers who offer credit insurance have very strict guidelines. Providing credit insurance is not an inexpensive investment. Non-recourse factoring greatly benefits you in lowering your risks of not getting paid.
Do You Know the Difference Between Invoice Factoring, Invoice Financing, AR Factoring and others?
The factoring industry has a complex variety of funding options. Many sound the same but can be very different. From accounts receivable financing to accounts receivable factoring to bill & hold to the letter of credit, these terms can be quite confusing and at the same time essential for your success. Give our factoring glossary a visit to educate yourself on the many terms used in the factoring industry.
Working with an experienced factor with an outstanding reputation helps small companies enhance their client relationships, gets the highest amount of cash in their pocket, fast and with ease. They will have upfront and clear fee structures and will not attempt to inundate businesses with hidden fees and charges. Experienced factors thrive and grow based on their reputation.