Once you’ve made the decision to inject capital into your business via factoring receivables, the process whereby you sell you current receivables to an accounts receivable financing company for near-immediate cash, you now have to decide which invoice factoring company is best for you and your business.
Choosing an invoice factoring company involves conducting research and doing some comparison shopping. Before you delve into this too much, it is a good idea to know specifically what you are looking for in a financing partner.
By making a list of your needs and preferences, you can help ensure you choose a company that is best suited for your business. In most instances, working with a freight factoring company can be a long term commitment. Like working with any vendor or third-party service provider, you want to make sure you select the best company that is right for you.
Accounts Receivable Financing Company Checklist
Here’s a list of common questions you might want to ask when selecting your invoice factoring company:
- Location: Is it important that the invoice factoring company have an office in your city, or are you comfortable working with a company via the phone and online?
- Financing Volume: What volume of financing will your business need? Before choosing a company as a partner, you need to have a pretty good idea about the amount of financing you will need month after month. This is important because some invoice factoring companies have limits, so if you require more than $350,000 in monthly financing, you need to make sure you choose a company that can handle that level of volume. Not all can.
On the flip side, if you are in trucking and transportation and only need to process $10,000 in receivables every month, make sure you partner with a freight bill factoring company that will work with these smaller amounts. Many freight factoring companies will work with businesses requiring low-volume monthly factoring but you need to confirm this upfront. Some freight bill factoring companies have minimum monthly requirements.
- Rates and fees: How much will it cost? This of course is an important question to all businesses seeking funding. When comparing accounts receivable financing companies, you will have to compare rates, which can be from 2-8 percent or higher, as well as transactional fees, which will vary from company to company.
So the rate of 3 percent will cost you $300 to factor a volume of $10,000, provided the invoice payment was submitted on time. Generally speaking, there will be additional fees if the client remits payment late, which is why you want to choose to factor with clients that routinely pay their bills on time.
Additional fees could include application fees, account management fees, administration fees and more. It might be suspicious if an accounts receivable financing company charges a super low rate of 0.5 percent; this might signal high transactional fees on the backend. Like all business deals, if it sounds too good to be true it probably is.
Moreover, invoice factoring companies that perform back-office account receivables processing and handling generally charge higher rates than invoice discounting, which does not offer any of these services.
- Industry-specific: Is it important that the invoice factoring company you choose specialize in your industry? This is most common with freight factoring companies but can also be found with government factoring, medical receivables factoring, and international trade.
- Online Services: Is it important that the invoice factoring company offer online account management services so that you can access your account at any time?
- Experience: How important is the company’s years of experience? If you are an established company, you might be looking for the same from your invoice factoring company. Yet newer firms might offer the same services — and even lower rates – though they lack the 10-year resume. An established firm isn’t necessarily better than a new one and vice versa.
- Reputation: It is important that the accounts receivable financing company you choose be certified by the International Factoring Association? The IFA is an organization that recognizes professionalism in the industry and sets ethics standards and guidelines. Ensuring the company you choose is certified can be a great start. Other companies, however, might not be certified if they are new or simply haven’t applied. In other words, just because an invoice factoring company isn’t certified doesn’t necessarily mean anything negative.
So when searching for your accounts receivable financing company, take the time to answer these and other important questions ahead of time to make sure you choose the best invoice factoring company for your business.