Last Updated on December 14, 2021
Considering invoice factoring as a cash flow solution for your business? 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 before choosing 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 for at least two years.
2. What is the factoring company’s 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 invoice factoring 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 will the factoring company interact with your 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 factoring company’s 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, and how likely it is that they factor will have funds available when you need them most.
The three main qualities of a good factoring company:
First and foremost, don’t get locked into a long-term contract. Contracts with one-year terms are one thing and should be expected. Contracts with multi-year terms and significant or even undefined termination penalties should be avoided like the plague.
Similarly, if your factoring agreement states that you must sell all of your receivables regardless of your need to do so, you should start looking around. Your factoring arrangement should mimic the flexibility of a traditional line of credit.
If your factor is not open to discussing these terms, shop around and keep looking.
If your factoring company is borrowing its money from a bank and then utilizing its line to purchase your receivables, then there are two important things to note:
- The cost of borrowing their funds from their bank is likely passed through to your business in the form of higher rates.
- The stability and security of your funding is reliant on your factoring company’s ability to remain in the good graces of their bank.
The easiest way to ensure your factor is providing a direct source of funds is to work with the source of funds itself – a bank. Alternatively, if your factor is an independent financing company, ask where they get their funding from and how long they’ve maintained that relationship.
In the event of economic turmoil, you’ll want to know that your financing partner won’t be cut off.
How do you know if your factor is professional and reputable? Just look at their interactions with your business in the buying process.
- Are they not only knowledgeable about their own products but your business as well?
- Is their pricing straightforward with no lockbox fees, transaction fees, clearance fees, etc.?
- Are they responsive to your calls, emails, and questions?
- Will they preserve good relationships with your customers?
Let us help make choosing a factoring company easy.
Looking for a good factoring company? 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.
Grey was previously the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helped businesses find the information they needed to make informed decisions about invoice factoring and A/R financing.