Selecting the right factoring company for your business is no easy task. A simple search on the internet can lead to thousands of results. Before you choose one of the many options, it’s important to understand your business needs and how the factoring company will meet your needs.
Before we go into tips for selecting the best factoring company, let’s first understand what a factoring company does and how the process works.
What Is A Factoring Company?
A factoring company provides financial services to businesses to help unlock working capital that is tied up in their invoices. Once you’re set up with the right factoring company, the process is relatively simple.
A business sells their open invoices to a factoring company. The factoring company advances a percentage of the invoice total, usually between 80 and 90 percent, giving the business cash to meet its needs. The factoring company then sends the invoice to the customer. The factoring company then waits for payment, sometimes weeks or even months. Once the customer pays the invoice at the terms previously agreed upon, the remaining percentage is remitted back, minus a factoring fee.
Now that you know what a factoring company is, let’s find out how to choose the best one for your business. Here are our tips for selecting the best factoring company.
What other services does the factoring company provide? Do they assist with collections, credit checks, or accounts receivable management? These type of back-office support services can be essential to businesses, especially those with limited staff and resources. Instead of worrying about collecting from your customers, you can focus on growing your business.
It is essential to make sure that the factoring company has experience in your industry. Having a factor with industry expertise helps ensure you get paid for the work you do. Since the factoring company knows the standard invoicing requirements and factoring rules, they have probably worked with some or all of your customers.
Experience & Credibility
How long has the factoring company been in business? Make sure you’re choosing a credible factoring company with a history of experience to ensure funding for your business.
What is the length of the contract you’re signing? Does it give you the ability to grow? Whether you’re planning for short-term invoice financing or a long-term partnership, make sure the factoring company can help you achieve your goals and meets the needs of your business.
If you need working capital fast, the time it takes to get setup can be crucial. Be sure to ask what is involved in the setup process and how quickly it can be done. Some of the best factoring companies can offer quick turnaround times for approval and deployment of funds.
Frequency of Funding
Most factoring companies can fund within 24-48 hours, but it may vary. Be sure the factoring company funds enough so that you’re able to meet your business obligations. When you are getting small business invoice factoring, the additional capital should help scale the business in times of need. If the funds are used carelessly, it could hurt the business.
Tips for Selecting the Best Factoring Company
Every factoring company charges a rate for their services. Many refer to this as the factoring fee. This rate varies depending on your industry, your customers, and the volume of your invoices. Be careful of hidden fees. Be sure to read the fine print of your contract and ask questions to get clarification of what the costs of services will be.
Recourse vs. Non-Recourse
It is important to find out if the factoring company is recourse or non-recourse. A recourse factoring company has the right to sell an invoice back to you if payment is not made by your customer within the agreed upon terms.
A non-recourse factoring company takes on the financial risks of the invoices, even if payment is not made within terms. Because there is more risk for the factoring company, rates are generally much higher. Even if a factoring company claims it is a non-recourse factor, read the fine print on the contract as some of your invoices can still be excluded.
Selecting The Best Factoring Company
If you do the proper research and ask the questions noted above, you’ll be able to find the best factoring company for your business needs. Once you’ve found the right one, your business will obtain steady cash flow giving you the ability to catch-up on bills, meet payroll and invest in new resources.