Choosing a factoring company is one of the most underrated decisions a business can make. Sure, it’s not as critical as expanding into a new market or rolling out a new service, but make no mistake: the invoice factoring company you work with can make the difference between a pleasant and profitable experience – or a disappointing and costly one.
Below are ten things to consider when looking for a trusted and capable factoring partner for your growing business.
Why You Should Work with a Factoring Company
Every company comprises different components handled by specialists to perform quality work. Unfortunately, some company managers tend to cover numerous responsibilities since they have a limited team.
This is why business owners must recognize their limitations and learn to delegate management tasks. For example, hiring an accounts receivable financing company is an excellent way to cut down your workload while optimizing your work financial resources.
If you’re still not convinced, here are three reasons you should work with an AR financing company:
Seamless Funding Process
Many mid-range startups depend on different loans to fund their operations. Since every loaning entity has a rigorous evaluation process, any mistake incurred can delay or deny applications. Thankfully, an AR financing company can receive your loan approvals much sooner since lenders have a viable company to verify your company’s financing. In addition, it gives your business better opportunities for a seamless funding process, allowing you to present your company as a creditworthy client to lenders.
Divertible Assets to Your AR Financing Company
Banks typically request upfront collateral before you can borrow from them. This is a financial disadvantage to business owners who are just starting out. Since building an enterprise is risky, it’s not uncommon for some business owners to use personal assets as collateral. It’s a dangerous decision that can backfire quickly if the business doesn’t pick up the pace and generate enough revenue.
Thankfully, an AR financing company can convert your unpaid accounts receivable and future invoices into your company’s collateral. The AR financing company will evaluate your company’s assets and give you viable options for your funding needs. Then, based on your company’s progress, the company will purchase these valuable invoices from you.
Robust Internal Financing System
It’s important to generate profit to supplement your business’s different processes. This includes paying for rent, utilities, insurance, and even office supplies. However, having cash on hand isn’t as simple as paying off your numerous overhead costs. You’ll need to account for different financial processes, including tax deductions, before determining your monthly revenue. Instead of getting lost in your ledgers, an AR financing company will speed up your cash flow without waiting for invoices to be paid in full. This gives you fewer worries concerning the consistency and precision of your accounts.
Things to Think About Before Choosing a Factoring Company
1. How Long the Company Has Been in Business
When you are trying to get critical financing for your business, nothing is worse than a fly-by-night operation that doesn’t have staying power. An invoice factoring company that has been in business longer has more experience and references to prove its worth.
Working with a stable invoice financing company is important when it comes to helping your business grow. You need to work with a company with a reliable and robust track record in the finance industry. Knowing you partner with a stable invoice financing company provides you with confidence that your business will be taken care of. One way to ensure that you are signing with a reliable factoring firm is to choose one affiliated with the IFA (International Factoring Association). IFA members adhere to stringent policies, business ethics, and practices.
2. Caps on How Much You Can Finance
Some companies have concentration caps on how much one customer can finance. Your business may not ever have to obtain more than any of these caps, but if you do, capped factoring can deprive you of the capital you need. Therefore, we recommend finding a factoring partner that does not cap their services.
3. How Much It Costs
Factoring is not free, but that does not mean it has to be expensive. The rate the provider charges is a key determining factor. A quality or service issue may lurk beneath the surface if a factoring partner offers cut-rate terms. And if an invoice factoring company’s charges are abnormally expensive, you may be overpaying.
Make sure the customer service and contract terms match the factoring rates you have been given to see if you’re getting a solid deal.
4. Terms of the Factoring Agreement
Signing a factoring contract with a great rate but disadvantageous terms isn’t a good deal. Likewise, the right terms – such as repayment schedules, advance rates, the type of factoring, cancellation fee, and contract length – can turn a good financial decision into a great one.
Carefully consider the entire arrangement, not just the rate you will be charged.
5. Recourse Vs. Non-Recourse Factoring
There are two types of factoring: recourse and non-recourse. Recourse factoring is what many customers choose. Under this option, any invoices that cannot be collected by your factoring company have to be bought back by the customer. In non-recourse factoring, the factoring partner takes on some or all of this risk.
6. How Long It Takes to Receive Funding
Time is money, especially when your cash flow is in trouble. The faster you can receive funding, the better off you will be. Look for a factoring company that can provide the funds in days, not weeks – ideally as soon as 24 hours after completing the approval process.
This deposit speed can help protect your business’s revenue stream and ensure you have the capital you need to complete projects and grow. Not all invoice financing companies offer 24-hour pay and some charge additional fees for faster payment terms, so it is important to know what each factoring company provides.
7. Sales Team Experience
Find a factoring company with abundant experience in treating customers and their debtors with confidence, professionalism, and expertise. This is a very underrated way to have a positive, top-notch factoring relationship.
8. Ease of Use and User Experience for Online Web Portals
We are firmly in the digital age, and no one wants to deal with clunky web portals or apps and have to resort to doing everything the hard way. An ill-designed and hard-to-use online portal is a nightmare that only frustrates customers looking to deal efficiently with their affairs.
Look for an online presence that is simple to use and easy to access and navigate.
9. Additional Products Offered
You may find yourself with needs beyond simple invoice factoring. A factoring provider that can offer various additional products – like inventory borrowing, small business loans, and accounts receivable factoring – is a great partner when you need flexibility and a full suite of financial solutions at your disposal.
10. Hidden Fees and Factoring Costs
Finally, it’s best to avoid companies with hidden factoring fees and costs. You should know exactly what the service will cost before you agree – which means partnering with a factoring company that believes in full transparency and honest disclosure. In this day and age, hidden payment terms and costs are simply unacceptable during the factoring process.
If you want to find the best factoring company that meets all of these crucial criteria, turn to Porter Capital and get instant funding for your business needs – all with the best track record and customer service in the industry.
Other Common Factors You Need to Consider
Along with the common considerations above, you should also keep in mind the following when looking for a factoring company:
- Types of invoices the business factors: Certain factoring companies will not accept specific invoices. For example, invoices for advance payments or deposits may not be included. Invoices for annual support fees or subscriptions may also be a source of contention. To avoid unpleasant surprises, be candid with factoring companies regarding the nature of your bills.
- The percentage of advance: The factoring company will advance you a percentage of each sales invoice. The balance is paid by the customer when the invoice is paid. This advance ranges from 70% to 95%, depending on the industry and the history of your business. However, some factoring companies are more generous with their payouts than others. Therefore, while comparing factoring firms, compare this section of the agreements.
- Minimum value: Certain factoring agreements stipulate a minimum monthly or quarterly total face value of factoring bills. If you fall short of the minimum, you may be charged a premium to compensate. Others provide “no-minimum” contracts that are not subject to such limits. As with all other variables, the minimum value is often configurable. A bargain with a low or no minimum may cost a bit extra.
- Distribution of funds: Two critical questions are included in this category. To begin, how long does it take to establish an account and obtain the initial tranche of sales invoice financing? The second concern is the speed with which you will be compensated. Most factoring companies will open an account and settle outstanding obligations within two to seven days. Additionally, you can anticipate new finance invoice advances within 1 to 2 days.
- Company reviews: A client review can go a long way. Looking at client reviews of the invoice financing companies you’re interested in can help a lot in this process.
Looking for a Trustworthy Factoring Company?
If you are looking to partner with a trustworthy factoring company, contact the team at Porter Capital so we can provide the best cash flow solution for your business.
We provide businesses in a variety of industries with invoice factoring, account receivable financing, working capital loans, asset-based lending and more. We’ve also funded over $6 billion to large and small businesses since we started back in 1991.
Let the team at Porter Capital help your business succeed. Get started by filling out our quick application form or give us a call today!