Choosing a factoring company is an important decision that should be considered carefully. You want a factor that understands your industry and that will work with you to provide the working capital needed to grow your business. A relationship that is transparent as well as flexible. The process you use to vet a factoring company should be as rigorous, in its own way, as the one you would use to select a key supplier.
The questions to ask when vetting a factor should be comprehensive and tailored to fit your business. There is no one-size-fits-all solution.
- Industry knowledge and experience – Does the factor have hands-on experience working with companies in your industry and if so, how long? Request the level of experience from any factoring company you plan to work with. Having keen insight and experience relative to your industry as well as other industries is invaluable. Experienced factoring companies are best positioned to serve your needs and ensure you are working with the best resource possible. This is also important for things such as structuring/ custom tailoring transactions, coming up with innovative business ideas, and helping you avoid pitfalls.
- Financial resources – Does the factor have the financial resources to fund the necessary transaction size and support your growth plans? What is the amount of credit facility the factor can provide? You will want to work with a factoring company that has the capacity to fund your transaction size. Small or new factoring companies may lack the resources to factor in your invoices or finance your POs. If you have a need to factor a $1MM invoice, you want to make sure they have the ability to do that.
- Customer service and immediacy – Does the factor have a presence in the same area that you are operating? If you need to get in touch with your Account Manager, how quick are they to respond? It can be very important for business owners to want to stop into an office if they have questions or are not sure about something. If there is no physical presence, you will want to see if they perform office visits or use virtual conference software such as Zoom, Skype, or Microsoft Teams. Factoring is a service industry and business owners need to have answers to their questions now; not in a few days or a week.
- Factoring programs – Do factoring programs include single invoice (“spot”) factoring and ongoing factoring programs? Some factoring companies will require a business to factor all their accounts receivable. However, businesses may only have a single-one time need for immediate capital to get them over a period of slower cash flow. It is important that the factor is flexible and are able to tailor a program to fit your needs. Working with a factor that offers both programs gives business owners the freedom and opportunity to factor all eligible customer invoices or select only specific ones.
- Recourse and non-recourse – Are recourse and non-recourse factoring programs available? Consider working with a factor that provides both types of factoring. Some of your customers may make better candidates for recourse factoring than others. Factors with a competent credit team can help your business deal with customers with poor payment histories. A good factoring company can help you make significant reductions in your losses due to non-payment by assisting you in analyzing the credit of your customers before you start the work or deliver goods.
- Other products – Does the factor offer other financing products such as purchase order financing, and trade and import financing? Find out what other services the factoring company offers. A single source for alternative financial funding can be more efficient and facilitate seamless business transactions.
- Funding turnaround time – How long does it take to receive the advance for factored invoices? You want to make sure the factor has the ability to provide you with prompt on-time funding. This can be especially important when you are in a pinch and have last-minute unexpected expenses pop up.
- Fees and discount terms – What are the fees charged and discount terms? How are they calculated? In certain factoring arrangements, the number of days the invoice remains outstanding increases the factoring fees. The factoring fee is typically calculated as a percentage of the total invoice value. Your factor fees rates may also be based upon the level of risk of your industry as well as the contract length. Be wary of factoring companies that offer very low discount rates as there typically will be other hidden fees. Additional fees may include monthly (or contract) minimums, applicable transfer fees, servicing fees, legal fees, termination fees, and the initial startup fee. Make sure the factor is upfront with you regarding its rates, service charges, and fees.
Once you’ve chosen a suitable factoring company to work with, like Capstone, you’ll want to start right away by providing the necessary due diligence for the underwriting process. Working with the right factoring company is important as it will ensure you have adequate access to cash flow to fuel the growth and long-term success of your business.
If you would like to discuss invoice factoring programs with a Capstone representative, please call (212) 755-3636.
