Choosing the Best Factoring Company

With so many options, choosing the best factoring company for your business may seem overwhelming. No two factoring companies do things exactly the same – they specialize in different industries, offer different terms and use different language. These differences make comparing factoring companies difficult.

Five questions to ask a factoring company:

1. How long have you been in business?

The best factoring companies have experience in the industry. Anyone with access to capital can set up a factoring operation, so by selecting a partner with several years of experience you automatically eliminate those factoring companies without a proven and stable operating history. The best factoring companies have invested time in improving procedures and protocols to give your business and your customers the best possible experience.

The International Factoring Association (IFA)’s latest Factoring Industry Survey states that 25% of factoring companies surveyed have been in business five years or less. While the influx of new factoring companies ultimately helps businesses through increased competition, make sure that your factoring company has been in business at least two years.

2. What are your terms, fees and funding limits?

The nuances of the financial details present the most variability when choosing the best factoring company for your business. Review proposals and contracts with your accountant to minimize unexpected financial impact.

The terms of the agreement include such aspects as contract length and whether every (or select) invoices will be factored. The industry standard is one to two years for an agreement term. Agreements typically auto-renew if 60 or 90-day notice isn’t given. Some factoring companies require factoring all invoices, while others allow for select invoices to be factored.

Fees can quickly add up and affect your bottom line. The best factoring companies present fees in an upfront manner and don’t try to sneak them in. Some fees to look out for include:

  • application fee
  • monitoring fee
  • credit reporting fee
  • fee for adding a new factoring customer
  • ACH fee
  • wire fee – for all wire transfers the Federal Reserve charges a convenience fee, but some factoring companies increase that fee
  • monthly volume fee – while this is a common fee to ensure the factoring partnership is being utilized, watch out for excessive rates
  • early termination fee – another common fee, but watch for high rates and long notification period

The funding limit describes the capacity of the line your business will be able to receive. Whether $100,000 or $100,000,000, you want a factoring partner who openly discusses these limitations. As your business grows, you’ll want to have a plan for the next phase. You don’t want to wait until you’re up against the limit to make the plan. Find a partner who can grow with you.

3. How frequently and quickly will our invoices be funded and payments applied?

The best factoring companies allow a business to submit and factor invoices daily. The business presents the invoices, while the factoring team processes and funds within 12-24 hours. Since some factoring companies take longer to process and fund your receivables, make sure your factoring company’s speed matches your cash flow needs.

When your customers’ payments arrive in the lockbox, you want the payment amount applied to your account quickly. The “float” impacts your outstanding balance and the amount of your factoring fees, so can significantly affect your bottom line. Look for payments to be applied daily.

4. How does the factoring company interact with my customers?

The best factoring companies receive your consent to interact with your customers. In these scenarios you’re aware of communication with your most valuable relationships – your customers. Many factoring companies will reach out to your customers whether or not you’re aware of it. This type of unexpected communication can build tension in a customer relationship. Find a factoring partner who is willing to take additional steps to make you feel comfortable with the level of interaction and keeps you informed of the contact.

5. Where are the funds coming from?

The funds that the factoring company advances you are coming from somewhere. Find out where. Knowing the origins will help you better understand how competitive your cost of funds is. A direct lender, such as a bank factoring company, receives funds from its rich deposit base, so the cost of funds is low. A bank-backed factoring company passes along these savings to factoring customers in the form of low rates.

Traditional factoring companies and independent financing companies must borrow the funds from someone else, so they serve as middlemen. As a result, the rates you pay these companies typically run higher to cover the additional cost of the borrowed money they advance your business.

We’re here to help

Looking for recommendations?  Not sure if you’re getting the full story from your current factoring partner? Don’t hesitate to contact us today and we’d be happy to provide our thoughts and help guide you in your decision process.

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What is Factoring? 10 FAQs

Q: What is factoring?

A: Factoring, also known as invoice factoring, allows a business to receive money owed to it in advance of collection. Rather than waiting 30, 60 or 90 days to receive payment, factoring provides a business-to-business company with much faster access to its money.

Q: How does factoring work?

A: A business engages with a factoring company  or independent financing company to create a factoring partnership. In this arrangement, the business sells its accounts receivable or outstanding invoices. The steps include:

1. The business sends a copy of the invoice to the factoring company.
2. The factoring company quickly advances 80-90% of the invoice amount into to the business’s bank account.
3. The business’s customer sends payment to a lockbox in the business’s name according to payment terms.
4. The factor releases the remaining 10-20% minus a small administrative fee into the business’s bank account.
5. The factoring arrangement gives the business faster access to cash, allowing the business to use the money immediately as it sees fit.

See this post for more detail on the factoring process.

Q: Is factoring expensive?

A: Factoring offers flexibility when traditional financing options aren’t a fit. Factoring rates tend to be higher than conventional business loan rates, but great variability exists among how different factoring companies structure deals. Finding a reputable partner with a transparent pricing strategy will ensure the business gets a competitive deal.

Q: Who uses factoring?

A: Many companies use factoring to help accelerate cash flow. A business-to business company generating invoices with payment terms may be good candidate for invoice factoring. Industries using factoring most frequently include:

• Staffing
• Distribution
• Facility Services
• Manufacturing
• Transportation
• Consulting
• Food & Beverage
• Wholesale
• Professional Services
• Textile & Apparel
• Oil & Gas
• Janitorial Services

Q: What will my customers think about factoring?

A: According to the Global Factoring Market 2016-2020 report, analysts expect factoring to grow over 10% annually for the next several years. With more companies utilizing invoice factoring, it continues to grow as a necessary and responsible way for financing a business. Understanding the manner and circumstances in which the factoring company will communicate with the business’s customers is important. As long as the communications are professional and in line with the business’s message, customers don’t typically have any issues.


questions about factoring


Q: When do companies use factoring?

A: Companies utilize factoring as a cash flow accelerator in many circumstances. A few of the most common uses include to:

• Purchase inventory or capital equipment
• Invest in marketing
• Meet payroll
• Meet tax requirements
• Obtain better payment terms by paying faster

Q: Why use factoring over other types of financing?

A: Factoring helps businesses accelerate their cash flow and secure financing in a debt-free manner. The sale of the business’s invoices funds the growth, so the business owner maintains control and doesn’t have to give up any equity or ownership. With factoring, the availability of cash keeps extending and growing as your business expands.

Q: Is factoring the same as a loan?

A: No, factoring is not a loan. The business does not incur debt. The business sells its accounts receivable (invoices) to the factoring company.

Q: Can a start-up business use factoring?

A: Yes, a start-up business may be an ideal candidate for invoice factoring. While traditional lending options often require two years of operating history and a track record of profitability, factoring provides greater flexibility.

Q: Will personal credit issues restrict a business owner from using factoring?

A: No, personal credit issues alone won’t keep a business from being approved for a factoring partnership. A host of factors go into the credit decision, with the most weight on the credit quality of the business’s customers. Some business owners using factoring have experienced bankruptcy, tax liens and other financial circumstances that make traditional lending options difficult to secure.

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