Factoring continues to be a very popular way for businesses to secure positive cash flow. In fact, there are more factoring companies in the marketplace today than ever before. Unfortunately, many of them are recent start-ups that have very little industry experience. Before entering into a factoring agreement, you’ll want to do your homework on the factoring companies that you’re considering.
For starters, make sure to get all of the important details about the company, its programs and fees up front. The following eight questions can help you uncover those crucial details and select an ethical, dependable and well-established factoring company:
1 – How credible is the factoring company?
How long has the factoring company been in business? Where are its offices located? What is the background of each member of the leadership team? Ask for referrals from current clients, and make sure to spend a bit of time contacting the references you are provided. Also, research complaints or issues reported through the Better Business Bureau.
2 – What is the fee structure?
Fees and advance rates can vary depending on your industry and the factoring company. Look carefully for hidden fees that may be charged. As a best practice, select a factoring company that provides you with a clear, easy-to-read contract and no ambiguous “fine print.”
3 – What is the duration of the agreement?
Ask about what terms they offer. As a customer, you want as much flexibility in your factoring agreement as possible. If they offer a long-term contract, will they adjust their rates based on increased factoring volume? Also, ask if the contract will automatically renew or if you have to give the company an advanced (30, 60 or 90-day) notice before terminating.
4 – Are they capable of growing with your business?
Your business’ growth often means more invoices that require funding. And, a big benefit of invoice factoring over traditional lending is that there is no cap on the level of financing. To determine a factoring company’s ability to grow with you, uncover as much information as you can about its financial stability and client base. Look at the factoring volume of their largest client, typical account size and limitations, such as the number of debtors the factoring company can take on. Factoring companies that have been in business and have served your industry for several years usually have a greater ability to finance your company as it grows.
5 – Are you dealing with an independent factoring company – or an intermediary?
Many “factoring companies” you may encounter are just third parties, or intermediaries. For example, they may be brokers, or they may have the appearance of a factoring company, but have little or no capital of their own. The intermediary can’t make its own decisions about contract negotiations or approval; instead, it must follow the orders of its funding source. Always partner with an independent, non-intermediary factoring company that relies on its own funds and can make its own decisions.
6 – What is involved in the approval process? What documentation is required?
Although not as stringent as banks, factoring companies do have some requirements for prospective clients. Ask the factoring company to explain to you what is required for approval. Do they require a credit report? What information do they request from you? Also, how long will it take them to review and approve your application?
7 – Do they have experience working with your specific industry?
It can be beneficial to partner with a factoring company that has experience working with businesses in your specific niche. When a factoring company has experience in dealing with your industry, it will better understand your customers and how to work with them successfully.
8 – Will you be required to factor 100 percent of your receivables?
Cash flow and collection patterns vary widely, and some weeks you may not need financing. Is there a requirement that you factor all receivables? Some companies require a certain sales volume.
What’s the next step?
Do NOT get stuck with an unethical or inexperienced factoring company — there’s far too much at stake to your business if you do! If you are still unclear about invoice factoring, we can help. Contact Interstate Capital first and our team can explain the factoring process to you in simple, easy-to-understand terms. Our goal is to make sure you feel absolutely comfortable with and educated about the factoring process. This aim will go a long way toward not only helping you select the right factoring company, but also safeguarding the financial success of your business.