Is this the right time to take advantage of invoice factoring? Selling your invoices to a reputable factoring company provides immediate cash, when your business may need it most. Meeting payroll, paying your own vendors and covering tax liabilities are all costs that businesses incur that invoice factoring can help take the sting out of. It can help increase the liquidity of any businesses financial status. The factoring company you choose will serve as an outsourced credit and collecting agency—taking on the responsibility of collecting and processing your invoices, so you can stay focused on daily operations and the long-range growth of your business.
What’s involved in selecting a factoring company? It’s a significant decision to make, since choosing the wrong company can damage your relationship with existing clients, harm your reputation overall, and possibly result in serious financial losses.
In other words, selecting the right factoring company is too important a decision to leave to a “gut feeling.”
Here are 6 tips and considerations to keep in mind when making your choice:
Experience and reputation in the Factoring Industry
Probably the most important single element to address is the experience of your prospective factoring company. Considering the complexity and sophistication of the service you want the company to provide, this is not an area where the “new kid on the block” should have the upper hand. Experience counts, especially when it comes to the quality of funding sources, track record and standing within the industry. It is important that you and the company you select both know how factoring works.
It’s well worth your time to investigate each factoring company’s reputation. Online research can indicate whether a company has a reputation for outstanding services, favorable rates, and so on – or, conversely, if most of the commentary is negative. Also, the company may act as one of the industries thought leaders at factoring conferences. In that case you may even be able to find video of them speaking on the subject.
Pay attention to warning signals that suggest a particular factoring company consistently fails to provide the services you need most.
Fees and rates on receivables factoring
Obviously, you want to have a clear grasp of the fees and rates involved. That’s why “reading the fine print, asking smart questions, and avoiding factoring receivables problems” is so crucial to your learning process.
Beware of factoring company contracts that seem too restrictive, for example, mandating that you must submit a specific number of invoices at a given time. Also questionable are contracts that come with restrictions that negatively impact your ongoing business operations.
When it comes to fee structures and rates, you want to get as much information as possible in advance. Here are questions to ask the factoring company:
- What’s the percentage of your basic factoring fee? (Typically, this is between 3-8%.)
- Does this fee cover all aspects of collection?
- Are rates based on monthly, quarterly or seasonal sales volume?
- Do you charge a weekly percentage fee for your services? (The length of time needed to collect on customers’ invoices can influence the amount of fees.)
- What “hidden fees” should we know about, such as cancellation charges, processing fees, set-up and/or application fees, bank transfer fees and origination fees?
- If a factoring company’s rates seem too high, don’t automatically opt for the lowest rate available. (In factoring, as in most other things, you get what you pay for.) More important are the terms you and the factoring company can agree on.
As with any business contract, penalties are also a key element to consider. You want to know ahead of time what specific penalties exist in the contract you’re asked to sign—such as penalties for failing to fulfill the length of the contract, neglecting to meet a monthly minimum, and so on.
Recourse and non-recourse factoring
It is vital to understand difference between recourse and nonrecourse factoring. In general, factoring companies offer non-recourse factoring, where they assume risk in the event customers fail to pay their invoices. They also assume the process of collecting on debts. Recourse factoring involves splitting the credit risk with the company that hired them. If the customer reneges on payment, the invoice is returned to the company, who either collects on what’s owed or assumes the bad debt.
Find out if the factoring company you’re considering offers both non-recourse and recourse factoring, or only one of the two services.
Company Location or Communication
You can tell a great deal about a factoring company’s potential value by how forthright it is in responding to your inquiries. In many cases invoice factoring clients want to enjoy the ability to “find a factoring company near me“.
Working with a company near you means that you would have the opportunity to stop into the office for a face to face. However, there are limitations to that since the right factoring companies aren’t always right there in your backyard. In some cases the right fit is more important and that’s when communication becomes a top priority.
A company that replies within an appropriate time-span is clearly preferable to one that gets back to you days, if not weeks later. There’s also the quality of their response. Generally speaking, you’d rather have too much information than not enough—but at the same time, it’s best to speak with an authoritative person who can spell things out in layman’s terms.
A factoring company representative who bombards you with technical jargon isn’t likely to be especially helpful over the long run.
Quality of service
Also related is the general sense you get about a factory company’s dedication to customer service. This includes not only how well they treat you and others in your business, but how well they handle your customer invoices. You definitely don’t want a factoring company that strong-arms valued customers into paying their bills. You should expect that they will deal with customers in a professional and respectful manner.
What about additional services a factoring company might be able to provide? It’s worth asking about such added services as:
- Invoice management
- Credit and background checks on prospective and existing customers
- Updates or notifications of collections
Explore the availability of a factoring company customer service representative with whom you can speak about your account. Having a single point-of-contact—or, when necessary, a team of representatives—is another indicator of a factoring company’s commitment to service.
Selecting an invoice factoring company isn’t an easy decision. But connecting with an established company that has a reputation for integrity and quality service an make the factoring process a great strategic move for raising money you need to grow for the future.