How to Select a Factoring Company?
As a business owner, you are well aware of the pressure and tensions involved in running a stable, healthy company. Not only is your business your livelihood, but the livelihood of your employees and team members as well.
The common tension of how to bridge the gap between your company’s invoices and actually receiving the money owed to you on those invoices can be resolved relatively quickly if you choose to go through a factoring company for those funds. The small percentage fees associated with accounts receivable financing or “factoring” can pay for themselves in the right situation when a growth opportunity arises where ready-to-go capital is needed.
But with so much riding on your receivables, how do you know which factoring company to choose?
Here are 5 things to consider when looking for an accounts receivable factoring company:
Freight businesses are different from healthcare offices. Nursing homes have different needs than manufacturing plants. Find a factoring company that has worked with businesses like yours before and who can clearly understand your company’s goals and business structure. Ask if your contact at the factoring company has a history of working with businesses like yours and how often.
Recourse and non-recourse?
Recourse factoring is an agreement between your company and the factoring company that if the customer does not pay their invoice, your company will buy the invoice back from the factor.
Non-recourse factoring means the factoring company takes on the risk of non-paying customer invoices. Due to the assumed risk, non-recourse factoring can be more expensive than recourse factoring.
Generally, factoring companies work with invoices that are from your credit worthy customers who have demonstrated a good track record in the past. This avoids the awkward situation of possibly having to buy back a non-paying receivable.
It’s important to find a company that can fit you with the best type of factoring (i.e. recourse or non-recourse factoring) and explain to you why one course of action may be better than another. If the factoring company you are considering has poor customer service and fails to point you in the best financial direction for your particular situation, it might be time to find another factoring candidate.
Long term or short term contracts?
Some factoring companies prefer the use of long term contracts with their customers and some cater to companies with short term or sporadic needs. Is your factoring company of choice open to purchasing smaller invoices as the need arises every once in a while? Or would a long term contract with the factoring company be more beneficial because of the frequent volume of accounts receivables you would like to factor?
Having an accurate idea of how exactly you would like your business to benefit from factoring will help determine which time frame (and therefore which factoring company) can best serve your needs.
Transparency and attention to detail
As with any business or financial agreement, it is very important to read all factoring contracts carefully. Different companies have different fees embedded in their contracts and it’s best to avoid surprises when it comes to how much your business is actually paying the factoring company. Cost is an important step in figuring out how to select a factoring company.
What should I know before I sign on the dotted line?
Before you contact a factoring company, figure out how much money in receivables you are wanting to factor per month. Perhaps you only want to free up 20-30 percent of the money your business has tied up in invoices? Or maybe having the built-in back office support of someone else handling your invoices jumps the percentage of receivables you would like to factor up to 80 or 90 percent. Figure out what you want most out of this arrangement and what your definition of success will look like. This will help you define your goals and how this form of lending can benefit you the most.
The best business decisions are the win-win ones: your cash flow goals are met so your business can grow and thrive, and the factoring company is paid for providing that money in a timely manner. Factoring has been around for hundreds of years and is a debt-free way to navigate the unique cash flow challenges of manufacturing, merchandising and service oriented businesses.
Advanced Funding Group can help
Many businesses are eager to bridge the gap between their company’s invoices and actually receiving the money owed to you. That is where Advanced Funding Group can help.
Advanced Funding Group has been reducing the common 30-90 day AR lag times for the businesses they serve since 2006. With factoring in place, you have the ability to have unlimited growth potential. When you are ready to select a factoring company, give us a call to talk about how we can do the same for your company.