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September 26, 2019 in

How to Evaluate and Choose the Right Invoice Factoring Company for Your Small Business

A strong economy drives small business growth–we all know that. However, with a rise in new businesses, we also see an increase in the number of companies turning to factoring. Why? Because growing businesses need ready access to capital and factoring has proven to be a quick and easy way for businesses to get it.

The challenge for businesses is that not all factoring companies are created equal. Finding the best factoring company for your business can be a daunting task.

A quick Google search will reveal your problem: hundreds of factoring companies to choose from. However, upon closer review, you’ll see that they range broadly in size, experience, and expertise. Some serve specific industries and others might only serve a segment of an industry. You’ll also see that fee structures, contract terms and funding options can vary widely from one factor to the next.

Choosing the wrong company can cost your business valuable time and resources, and the possibility of alienating your best customers. When you find the right one, you have a valuable partner in the growth of your business.

Start narrowing your search by seeking answers to these questions:

1. Does the factoring company have experience in my specific industry?

You can quickly eliminate factoring companies that don’t ordinarily serve businesses in your industry. Having expertise in your industry–your type of business in particular–ensures that the factor is current with issues that can impact your business and uses a structure that’s compatible with your processes. Look for factoring companies with a proven and stable operating history within your industry.

2. How strong is the factoring company’s reputation?

Working with a factoring company is not unlike working with a bank. It’s about your money. It’s important to ensure the company is reputable as evidenced by many years of experience keeping promises and treating customers fairly. It’s a good idea to avoid companies that haven’t been in business long enough to establish a real reputation. That said, still do your due diligence on the ones that have been around for a while. Leverage sources like the Better Business Bureau and other review sites to ensure that other customers have had good experiences.

3. Is the factoring company associated with a bank?

Many factoring providers are independent financing companies, which means they must borrow funds from a third party to fund your invoices. As the middleman in the transaction, these companies often have to charge higher rates to cover their own borrowing costs. That doesn’t mean they’re always a bad choice, and many offer competitive rates and same day funding. However, if something goes awry with the factor or their third-party lender, your funds may no longer be available, putting your business in a pinch.

A factoring company that is backed directly by a bank, or is a bank itself, can operate as a direct source of funds. That means they do not need to borrow from a third party to fund the purchase of your receivables. With a bank factor, you’ll often find that the cost of funds is lower and the savings are passed on to you. Most banks are also regulated by the FDIC, which can offer you an additional sense of security.

4. Are their rates and terms competitive and fair?

Here’s some good news: The increasing competition in the factoring industry is putting downward pressure on rates. Because factoring rates are calculated based on a number of things, including the monthly volume of invoices you want to factor and the average size of each invoice, factoring companies have some wiggle room to compete with other providers.

While you should always compare rates, don’t rely solely on a quote for your decision. There are other elements that can impact your factoring costs, including hidden fees and sneaky rate structures. Don’t sign anything until you have thoroughly read the fine print of your proposal. If you wind up paying too much on things like the application, monitoring, wire processing, or monthly volume fees, you may be better off choosing a factor that charges slightly higher rates without all the extra stuff.


5. How quickly and frequently will your invoices be funded?

The best providers will allow you to submit and factor invoices daily or weekly. They can also process invoices and provide funds within 12 to 24 hours of submission. It may be okay to work with a factoring company with a slower turnaround, but always make sure their schedule matches your cash flow needs.

As a growing business, you will likely sign new customers and/or increase your outstanding receivables over time, hopefully sooner than later. Make sure you can easily adjust the amount that you’re factoring. Put another way, if you sign a new customer tomorrow and need to sell additional invoices, make sure you’re able to do that on short notice. The same goes for decreasing your receivables–your factor should allow you to pull back on factored invoices if you lose or have to fire a customer.

Beware of the float

“Float” refers to the difference between the time the factor receives an invoice payment and when it gives you (the customer) credit for that payment. Float days can have an enormous negative impact on your factoring costs.

For example, let’s say you have an outstanding invoice with net 30 terms, and your customer pays that invoice on day 28. Your factoring company charges a 1.5% fee for invoices paid in less than 30 days, and 2.5% on invoices paid in 31-45 days. If that company has a 3-day float period, they can hold credit for your payment so that it gets bumped into the higher rate, resulting in a 66% increase in your factoring fees. Not cool, right?

The best factoring companies will give you credit for the invoice on the day it was submitted–even if the payment has not yet processed in full, ensuring consistent and predictable costs for your business. Some payments can take a while to process (like ACH transfers), but your ideal factor will not let that time affect your rate.

It all boils down to one thing: Do your homework. The more you understand all the potential factoring costs, the better positioned you are to find or negotiate more favorable terms for your business.

Other things to consider

There are several other points to consider when identifying the best factoring company:

Does the company require monthly minimum amounts to be factored each month? Many factors require that you submit a minimum dollar value each week or month. This reduces your flexibility and may force you into a situation that’s not be best for your business. A good partner will not require minimums.

How will its representatives interact with your customers when collecting payments? When you sell your invoices, the factoring company reserves the right to directly contact your customers to collect receivables. Make sure that you trust your provider to do this respectfully and responsibly in order to preserve your hard-earned customer relationships.

Does the factor offer online submission of invoices? In today’s digital age, most everything is done online. Some factors will allow you to submit and track invoices via an online portal, making your life easier by preserving data so nothing slips through the cracks.

Summing it all up

Getting the answers to all of these questions is key to making sure your business is in the right hands. Beware of companies that don’t match your desired criteria and make sure to always ask for details in writing. The right factoring provider should be one you can trust to help your business grow and will not take advantage of you during a time of financial need.

Invoice factoring often gets a bad rap, but if you do your research and choose your provider wisely, it can be a game-changing solution for your cash flow problems.


This content was originally published here.

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Working Capital Group, LLC
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