There are lots of factoring companies out there but how do you pick the right one. First it is important to understand why you might factor. Factoring allows companies to collapse the cycle between shipping products and receiving payments by advancing 70% to 90% against a customer invoice immediately. Most factors can fund the same day an invoice is valid and most within days. Thus, a factor can help you speed up the conversion of cash tied up in accounts receivables.
Here are some guidelines for picking a reputable factor and also a factor that is a good fit for your business.
Knowledge of the client’s market. Does the factor understand your business and industry? Have they worked with some of your clients? As a test, ask the prospective factor to assess the creditworthiness of your top accounts. Did the prospective factor give adequate credit limits for you clients? If the credit limits are too low, then you won’t be able to factor as much as you planned and this factor may not be the right choice. You want to make sure the factor can grow your credit limits as you grow sales. Otherwise, why factor.
Cost of money and fees. Different factors have different pricing models and will price the same deal drastically different. You need to understand what you will actually pay for factoring. If a factor’s pricing model is complex and seems to have a lot of variables, chances are you will pay more than you think. Go with a factor with an easy to understand pricing model. The easier it is to understand a pricing model the better you can manage the cost. Beware of low “tickler” rates which sound great but will usually have a ton of buried costs.
Buried costs. Make sure you’re clear on the factors’ agreement and what the actual fees will be. Go thorough lots of examples with the factor so you understand when possible extra costs will be charged. For example, does the factor charge any administrative fees, termination fees, minimum use fees, or document fees? Most companies don’t take the time to read the legal documents and are later shocked at all the fees they are paying. Do your homework and ask a ton of questions.
Multiple references. Ask the prospective factor for references. You should get references for past and current clients of the factor. This will give you a chance to find out how the factor has handled other clients and will allow you to get a real idea of who you will be doing business with. If the factor won’t provide client references, then this is not a factor for your company!