How to Choose the Right Invoice Factoring Company
If you’re a B2B or B2G entrepreneur who wants to receive cash before your outstanding invoices become due for collection, invoice factoring is an option you should consider.
Through invoice factoring, you can sell your unpaid invoices to a third-party company (called a factor) to get a percentage of the invoice amount as a cash advance. After your customers pay, the factor will then take its fee from the remaining percentage then send you the rest.
If invoice factoring seems right for your business, choosing the right factoring company is one of your most important decisions to make. To help you choose, we’ve compiled a list of 9 things you need to consider when picking a factoring company.
1. Are they knowledgeable about your industry?
Many factors say they can work in most industries. However, some fields – such as the construction, transportation, and medical industries – are better served by factoring companies that specialize in those niches. It is best if you choose a factor that knows the ins and outs of your industry.
To gauge a factoring company’s expertise in your field, ask the sales representative some niche-specific questions and request client references from your industry.
2. Do they offer recourse or non-recourse factoring?
With recourse factoring, the business owner assumes more risk: if the customer fails to pay, the business owner has to pay back the factor. With non-recourse factoring, meanwhile, the factor takes on more risk.
Because of the higher risk, many factors do not offer non-recourse factoring. The ones that do charge higher fees and decline invoices from customers with poor credit scores or credit history.
3. Do they offer competitive advance rates?
Is the advance you’re going to get large enough for your needs and competitive compared to the ones offered by other factoring companies?
Advance rates usually range from 70% to 95%, with 80% as the average for non-specialized industries.
4. Are there minimums?
A factoring minimum is the amount you need to factor each period. If you factor below the minimum, you must pay the difference.
If you agree to set a minimum in order to get a lower rate, make sure it is low enough for you to meet.
5. What is the fee structure?
The rate you receive depends on the average amount of your invoices, the total amount you’re planning to factor, and how creditworthy your customers are. The factoring rate usually ranges from 1% to 5% of the invoice’s value per month.
When comparing the fee structure of different factoring companies, check that you’re making accurate comparisons. Is the factor fee the only fee you need to pay or are there others more? Make sure you are clear about this.
Be careful of companies that advertise very low rates but charge a lot of hidden fees, such as application fees, background check fees, monthly processing fees, and invoice submission fees. What looks like a good deal on first glance can end up being a big financial drain if you’re not careful.
6. How long have they been in business?
The length of time a factoring company has been in business is an important consideration, especially if your business is in a highly specialized field. An experienced factor understands an industry better and can offer better rates as well as more sophisticated funding deals.
7. Do they offer flexibility?
Will you be stuck in a long-term contract or be charged pre-payment penalties? Can you choose which invoices to factor or are you required to factor all invoices or all invoices from a certain customer?
8. Who is in charge of collecting payments from your customers?
With invoice factoring, the factoring company interacts with your customers and takes care of collecting payment from them. With invoice financing, meanwhile, you are still the one in charge of payment collection.
There are company interacts with your customers. Some, however, do not want an external representative contacting their customers, as that can confuse the customers or give them a negative impression.
The problem is that many funding companies use the terms “invoice factoring” and “invoice financing” interchangeably, so be sure to clarify the issue of payment collection with the factor before signing any contract.
9. Do they have good customer service?
Check the reviews posted by the factoring company’s clients or ask for referrals to make sure you choose a factor that provides good customer service. A factoring company with competent and respectful employees will not just make things easier for you but is a must if the factor will be interacting with your customers as well.
Through invoice factoring, a B2B or B2G company can free up capital that is otherwise tied up in outstanding invoices. Not all factoring companies are a right fit for your business, however. By answering the questions above, you can choose the one that is the best for you.