How to Select the Right Factoring Company
So, you are sold on selling some invoices, you see the benefits, but you are just not sure how to select the right factoring company. Here are 7 essential factors to consider and compare:
1. Recourse or Non Recourse – Recourse typically alludes to a Factor having the right to make you buy the invoice back in the event the payer or debtor does not come through. Non-recourse is just the opposite – the Factor is on their own. Typically most Factors will have some sort of recourse but the terms of how that operates are worth comparing.
2. Term of Relationship – Some Factors require a term outlining how long you must factor accounts receivable with them. Typically this is one-year term, but it varies Factor to Factor. You don’t want to tie yourself to a Factor that you may outgrow so look for contracts you can easily terminate with advance notice.
3. Fee Structure – The fee structure affects your bottom line. Since this can vary greatly it is one area where you want to shop around. The discount fees are typically around 3% but could be much less (or more) depending on the types of account receivables and the individual business. Some factoring companies might also charge a one-time set up fee before purchasing invoices.
4. Monthly Minimums – A Factor might require a minimum volume level each month. For some businesses this is a non-issue given their volume levels; for others this can be a serious challenge. In either case there are Factoring companies that don’t require monthly minimums or simply work off a monthly average.
5. Service – Don’t underestimate service. Is the Factor impersonal? Are they late in returning phone calls? If so, you may want to look for someone else. Many companies will give up a little on the fee structure to have a company with better quality service.
6. Full Service Factor – Many Factors offer services that go way beyond purchasing invoices. They can pre-qualify potential clients, handle billing and collections, or even help during tax time. Although you may not need any of those services initially, consider picking a Factor that can grow with you.
7. What about factoring brokers or consultants? – Many companies work through a broker. Although this seems like you are adding another layer, brokers often know numerous Factors. They can assist with the comparison shopping and pair you up with the best factoring company that fits your needs. Since factoring brokers are paid by the Factor directly you typically don’t give up anything in the way of fees to work with a consultant or broker.
A successful accounts receivable financing program should provide cash advances that meet your needs. Feel confident in selecting the right company to factor invoices by comparing services upfront.