Factoring invoices is an excellent way to free up working capital. However, not all invoice factoring companies are the same, as certain invoice factoring companies do operate under widely disparate terms and conditions.
Additionally, factoring companies have varying reputations. Therefore, before entering into an invoice factoring agreement, take a look at some critical considerations. Here are some things you should consider in a factoring company:
1. Types of Invoices A 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.
2. Calculating the Factoring Rate
Factoring companies charge interest on advance payments. These interest rates range from 1.15% to 3.5% each month past due. When comparing factoring rates, it’s also necessary to factor in additional expenses. Certain businesses advertise low rates but demand additional fees.
3. 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.
4. The 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.
5. The 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.
6. Recourse Vs. Non-recourse
Factoring agreements are classified into two broad categories: recourse and non-recourse. A recourse agreement provides for the charging back of an unpaid sales invoice to the issuing entity. The factoring company accepts the risk of bad debt under a non-recourse contract.
Non-recourse agreements, on the other hand, often cover non-payment only as a result of bankruptcy or customer closure. Additionally, non-recourse factoring is more expensive than resource factoring, as the factoring supplier must cover bad loans.
7. Experience in the Industry
Certain factoring companies specialize in particular industries, while others service everyone. While industry expertise is not essential, it is advantageous. A factoring business that is familiar with your industry may customize its services to your specific needs.
A professional in your sector may already have relationships with some of your consumers. Specialization in a particular industry may also be advantageous if your requirements are unique. If this is the case, a sector-specific factor has almost certainly addressed comparable difficulties.
8. The Longevity of the Company
Factoring companies have gone out of business in some instances, leaving clients with immediate cash flow concerns. Therefore, before contracting with a factoring company, conduct some research.
Take into account the company’s age and finances. Additionally, solicit referrals from industry colleagues and conduct an internet search for the company’s online reviews.
9. The Potential for Collaboration
While selecting a factoring firm, look at the individuals. Because, in contrast to the majority of other lenders, you will need to work closely with a factoring company. Obtaining the factoring deal you desire is merely the beginning.
This entails constant communication with your factoring business. Additionally, your clients will be able to contact the factoring team. As a result, you must be confident in your capacity to collaborate with the organization you have picked.
Choosing a factoring company is a significant decision. Therefore, conduct due diligence before selecting the best factoring service for your business. The most reputable factoring organizations will collaborate with you to achieve a win-win solution.
Are you looking for reasons to avail of factoring? Porter Capital offers working capital solutions to businesses in the United States. Providing over $6 billion in the capital as a direct loan and factoring company, our services include invoice factoring, accounts receivable financing, working capital loans, and asset-based lending. Apply now!