Once you have decided your company needs to factor, your next step is finding a factoring company.
Today, there are more factoring companies, or “factors,” in the marketplace than ever before. That should benefit you as a factoring client. But it can also lead to confusion when searching among the many competitors for the right factor to meet your business needs. Below are four key issues to consider when selecting a factoring company:
Fees and Terms
Before entering into a factoring agreement, pay close attention to the terms of the contract and the fees the factor will charge. These can vary greatly depending on the factor and the industry it serves. Some factoring companies only charge a flat factoring fee, which is a percentage of the total value of the customer invoices you sell them. Other factors charge additional fees that cover money transfers, shipping, collateral and other costs of doing business. Make sure the factoring company you work with is up-front and transparent with you about its fee structure.
A long-term contract with a factoring company can be desirable if it includes a price break or flexible rates. Many factoring companies will adjust their rates based on increased factoring volume or competitive offers from other factors. The industry standard for most factoring agreements is a one-year contract. With most factors, that contract will automatically renew unless you give the factor a 60- or 90-day notice.
Recourse and Non-Recourse Factoring
Before your company starts factoring, it is important to know the difference between recourse and non-recourse factoring. You need to decide which type of factoring is the best fit for your company and its customers. With non-recourse factoring, the factoring company assumes all of the credit risks for the collection of the invoice. Recourse factoring means that you, the client, are ultimately responsible if the factor cannot collect on your customer invoices.
Recourse factoring has some benefits. It is less expensive than non-recourse factoring. Having a customer default payment under a recourse agreement does not mean that you have to pay the debt out-of-pocket. The factoring company may withhold a portion of future cash advances or reserve payments, putting the money in an escrow account until the debt is settled.
It is to your advantage to find a factor that offers both recourse and non-recourse factoring, as some of your customers may be better candidates for recourse factoring than others. A factoring company with a strong credit team can also help ensure that you are working with good customers. This relieves some of the pressure of “being on the hook” for bad debt.
Experience and Capital
You want to find a factoring company that has experience in your industry and the capital structure to fund your company as it grows. While there are a lot of factoring companies to choose from, many of them are recent start-ups with very little experience. Before entering into a factoring agreement, research the factor’s history and background providing financial services in your field.
As your company grows, the funding of your customer invoices should grow with you. Find out as much information as you can about a factoring company’s capital structure and client base. What is the factoring volume of their largest client? What is a typical account size? Is there a limit to how many debtors the factoring company can take on? Factoring companies that have been in business and have served your industry for several years are usually a better bet than start-ups.
There are more benefits to factoring than just increasing your company’s cash flow. A factoring company will handle collections on your customer invoices, saving your company time and resources. Factors can also provide credit information and evaluation of companies in your industry. The best factoring companies in the marketplace put a premium on accessibility and customer service. They offer online accounts that allow you to monitor your factoring volume and payment trends from your customers. They match you with a single representative to address concerns or any questions you might have about your factoring account.
When shopping for factoring companies, make sure you find one that offers additional products, as well as a level of customer service that can help your company make good business decisions and grow.