Choosing the best factoring company is one of the most vital decisions you make for your business. You will be working with the factoring company for a while and your growth depends on that relationship. You cannot take this financial decision lightly.
Invoice factoring is selling your invoices (accounts receivables) to a third party or a factoring company to reduce debt and improve cash flow. Businesses that use invoice factoring see an immediate boost in cash flow. Independent finance providers or banks provide invoice factoring.
Invoice factoring services are a solution to cash flow problems. It provides short term capital by assigning and selling invoices to a factoring company or factor. The factoring companies usually give 70-90% of the invoice value in advance. Invoice factoring is an excellent option for businesses and companies that need access to cash quickly but are not able to secure a traditional bank loan.
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We will be discussing the top 11 amazing tips for choosing the best factoring company for your business.
- SERVICES- When you choose a factoring company, you must always consider the kind of services you require for your business. Do you want all of your invoices factored, or do you want to be able to select which invoices you want to factor and if you are ready to take on any risk if a client is not able to pay for an invoice?
- TERMS – There are some important terms and options that you should know about. There is spot factoring that lets you factor a single invoice for one time without any long term agreement. The fees are generally higher in spot factoring.
One option is whole ledger factoring, where you need to submit all your invoices and you need to sign a contract. In recourse factoring, the business or the company is liable to pay back and is responsible for any risks. In non-recourse factoring, the factor or the factoring company is liable and responsible for unpaid invoices.
- INDUSTRIES THEY WORK FOR – Many factoring companies state that they are comfortable working with any industry. But the best factoring companies usually specialize in one industry. Your business will grow best if you work with a factoring company that knows your industry properly.
To know if they are aware of your industry, you must question the factoring company and see if the company is knowledgeable. You must also ask for customer references from the factoring company.
- FEES AND RATES – The fee structure for factoring companies ranges is either flat or variable. The lower your rate will be if you factor your invoices more. Variable fee structure or tiered fee structure, for as long as the invoice is outstanding, the factors will discount a small part of the invoice. This means for as long as your invoices go unpaid, the more fees you will gather over time.
Variable fees are complex to calculate, but they are more cost-effective depending on your business.
- WHO CAN USE FACTORING- The great candidates for invoice factoring are B2B businesses with reputable clients and longer net terms. The industries that use factoring are transportation, consulting, staffing services, retail, manufacturing, oil and gas service companies, construction, commercial services, distribution, IT services and software development, freelancers in the field of marketing, PR and creative, etc.
- ADVANCE RATES – Depending on your business and industry, advance rates generally range between 70%-95%. The transportation industry and staffing companies qualify for advance rates in the range of 90%-95%. Depending on the risks, most businesses in the construction business get up to 70% rates.
- RECOURSE AND NON- RECOURSE FACTORING – One important tip is to know if the factoring company offers recourse and non-recourse factoring. In recourse factoring, the business or the company is liable to pay back and is responsible for any risks. In non-recourse factoring, the factor or the factoring company is liable and responsible for unpaid invoices.
Given that there is a higher risk, only 20% of the factoring companies provide non-recourse funding and those companies who offer this type of factoring generally charge high fees.
- MINIMUMS – Some factoring companies offer plans with minimums, while other factoring companies offer plans with no minimums. A factoring minimum is an amount that you require to factor for a given period time. This could be a month, a quarter, or a year.
You need to pay the difference if you factor less than the minimum charged by your factoring company. You can also use minimums as a negotiation to receive lower rates.
- CUSTOMER SERVICE – The factoring company that you choose must have a strong customer service. It is very important. Customer service is vital to you as a company owner. The factoring company should be efficient and fast. Customer service is not only important to you but also for your customers.
The factoring company gets in touch with your customers, so you must find a factoring company that is well mannered and treats your clients with great respect. You must ask for company referrals and check client reviews to determine whether the factoring company has good customer service.
- FLEXIBILITY – Make sure that you choose a flexible factoring company. Some factoring companies require payment penalties or monthly minimums, and long-term agreements. You must choose a factoring company that lets you select which invoices you want to factor and when. You should avoid terms and conditions in which you have to factor all invoices from a particular client.
Some factoring companies take over your accounts receivable and become responsible for sending invoices and collecting payments. Many small business owners and operators prefer to have ownership over their client relationships and send their invoices by themselves.
- SETTING UP TIME – Many factoring companies can set up your account in 3-5 business days. Bigger accounts can take a few more days to set up because it requires extra effort and diligence. Due to financial emergencies, if you need the money quickly, setting up an account should not be the most important concern when you choose and examine a factoring company.
These are some tips that will help you in choosing the best factoring company. Invoice factoring services to improve the cash flow of your business ad provides stability and growth.