What is factoring?
Using a factoring company allows to you to provide an immediate solution to your cash flow needs. Factoring is a form of financing in which a business sells its invoices to a third party financial company, or factor. A factor advances funds on a percentage of the invoice and deposits the cash directly into your account. Once the invoice is paid, the factor rebates the remaining percentage less any fees. Business owners use this type of financing to cover payroll, take on a larger contract, grow the company or a variety of other reasons. The benefit of factoring is it improves a business’ working capital and cash flow by allowing it to receive cash more quickly than waiting 30 to 60 days for a customer payment. Factoring can also be referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing.
If you realize factoring is right for you, how do you choose a factoring company?
Choosing a factoring company should be done carefully. The terms and conditions of factoring can vary depending on industry and by company.
Here are some things that you should consider before picking a factoring company.
1. Do you need an industry specific factoring company?
While factors serve a broad range of industries, some industries require specialization. Some of these specialized industries include transportation, medical and construction factoring.
2. Does the Factoring Company offer Recourse or Non-Recourse Funding?
Recourse funding requires the business owner to guarantee and assume the risk if their customer fails to pay the factored invoice. In non-recourse funding, the factor assumes all risk of nonpayment of a factored invoice, and the business owner assumes no risk. However, given the higher risk , less than 20% of factors offer non-recourse funding, and those that do, will typically have a higher fee structure.
3. What are the Terms and Rates/Fee Structure?
Not all factoring companies have the same terms or fee structure. Factoring companies that claim to be the fastest, cheapest and easiest to use might not be the best for your business. These companies often nickel and dime you through additional or hidden fees such as application fees, background check fees, field examination fees, attorney’s fees, UCC filing fees, monthly processing fees, invoice submission fees, ACH fees and wire fees. Factoring fees range can from 1-5% per month on the face value of the invoice. Some companies advertise very low fees of 1%; however, they make up with hidden fees. Factoring advance rates can range as well from 70-90%, but typically tend to be 80% for non-specialized industries. An advance rate is the percent of the invoice face value that you will receive right away. Just remember…what might seem to be the cheapest or best option can turn out to be the more expensive or more restrictive option with additional fees or lower advance rates.
4. Flexibility
When choosing a factoring company, make sure you choose a company that offers flexibility. Some companies require long-term contracts, pre-payment penalties and/or monthly minimums. Additionally, choose a factoring company that allows you to choose which invoices you want to factor. Avoid terms in which you have to factor all invoices or factor all invoices from a particular customer. Lastly, some factors will take over your accounts receivable function, which means they will be responsible for sending all invoices and collecting on them. While this outsourcing might seem appealing, many small business prefer to retain ownership over their customer relationships and send their own invoices.
5. Experience
When searching for a factoring company, try to find one that has experience with businesses like yours and has been in business for a decent time period. Although the process of factoring invoices might be standard, some industries may require different services than others. For example, freight factoring companies offer different benefits to truckers such as fuel cards or fuel advances.
6. Customer Service
Although hard to determine, finding a factoring company with strong customer service is important in two ways. First, customer service is important for you as the business owner. The factoring company should be fast, efficient and do what they say they will do. Second, customer service is important for your customers. The factoring company interacts with your customers so finding a company that is well mannered and treats your customers like you would treat them is essential. One way to determine customer service is to ask for company referrals or check customer reviews.
For over 10 years, Cash Flow Resources (“CFR”) has partnered with small businesses, helping them grow and meet their business goals. As a small business, we understand the struggles entrepreneurs face. Throughout our years in business, we have worked with many different industries including, but not limited to, staffing, manufacturing, and construction. We offer dependable service with the flexibility for you to factor as many or as few invoices as you need for your business.
Let CFR be your cash flow solution. Contact us today at [email protected] or 504-522-6065.
