Invoice factoring is a financial tool used by many companies to help increase cash flow. The process is relatively simple. You sell your open accounts receivable to a factor in exchange for immediate cash.
You benefit by having access to the current value of your open invoices in a matter of hours instead of having to wait 30, 60 or 90 days to be paid by your customer.
This article gives you the three easy steps necessary to find the right factoring company for you.
1. Initial Research-- The first step in finding the right factor for your company is to do a brief survey of the market. While Google is a great way to start, you'll be inundated with results. One of the ways to make things easier on yourself is to start your search on the website of the International Factoring Association, www.factoring.org.
The IFA is a trade organization of banks and commercial finance companies that provide factoring services. Any reputable factoring company should be a member of the IFA. Search their website by industry or geography to find a good initial list of factors to contact.
- Pay attention to the geographies and industries they serve as well as the size of the facilities they provide. Size is an important criterion. Factors tend to specialize in providing financing to companies in specific annual revenue ranges.
Related: Small Business Factoring
2. Compare Firms -- Once you have an initial list of firms the next step is to dive deeper into the specifics of each company in order to make an informed comparison. The following is a list of questions that each factor should be asked:
- How long have they been in business? The length of experience a firm has directly effects their ability to handle your account.
- Are they brokers or direct funding companies? There are many brokers that advertise as factoring companies but it is important to identify at the beginning of a transaction if the entity you are dealing with is a broker or a funding company.
- What is the typical pricing structure for companies like yours? Ask them to send you a list of all the different charges that are associated with the facility.
- What is advance rate? This is the percentage of the face value of the invoice the company advances when the invoice is created. Typical advance rates are between 80% and 90%.
- How do the mechanics work? With the changes in technology, there are online factoring companies who handle the entirety of their clients' transactions via the internet. Make sure to understand how any invoice is funded and how you are able to track all the charges on your account.
Related: Compare factoring vendors
3. Sign the Deal --I recommend going through the due diligence process with two factoring companies. Be upfront with both the firms that you are working with one of their competitors to make sure you find the right match.
Once approved, you receive a factoring contract along with a few ancillary documents to review and sign. Typically factoring contracts are anywhere between 10 and 30 pages. They are pretty technical documents and are often difficult to read and understand. I recommend that you read them in detail and then review any questions you have with a lawyer who is familiar with factoring.
Confirm the following business terms in the contract:
- Contract term
- Advance Rate
- Personal Guaranty
- Events of Default
- Fees and Charges
The most important thing in finding the right factoring firm for your company is to give yourself plenty of time to do the research and make the right decision. The last thing you want to do is put off this process until it becomes critical to the survival of your firm.