Complete Guide to Choosing a Factoring Company

Factoring

Here’s what to do when choosing a factoring company.

Ask the Important Questions

What are your terms?

As a customer, you want as much flexibility in a factoring agreement as possible. A long-term contract with a factoring company can be desirable if it includes a price break or flexible rates. Many factoring companies will adjust their rates based on increased factoring volume or competitive offers from other factors. The industry standard for most factoring agreements is a one-year contract. With most factors, that contract will automatically renew unless you give the company a 60- or 90-day notice.

  • What to watch out for – you want a company that can answer all your questions. Ask the factoring company what their contract renewal process looks like, so you know what to expect.

What fees do you charge? Are there any “hidden” fees?

This can vary depending on your industry and the factoring company involved. Some factors only charge a flat factoring fee, which is a percentage of the total invoice value. Other factors charge additional fees that cover money transfers, software, collateral and other costs of doing business. Make sure the factoring company you work with is upfront and transparent with you about its fees.

  • What to watch out for – a factoring company that charges minimum-volume fees or has other hidden fees. These are fees that a factoring company charges when a customer doesn’t factor a certain amount in a given month, as outlined in your factoring agreement.
  • Other fees to ask about: hidden, minimum-volume, invoice uploading/processing, quick pay, etc.

Do you offer both recourse and non-recourse factoring?

Recourse factoring means that you are ultimately responsible if the factor cannot collect on your customer invoices. A good factor will make every effort to collect payment before sending the invoice back to you. And they shouldn’t ask for a lump sum up front. Instead, they may take a portion of future cash advances or reserve payments to repay the invoice total.

With non-recourse factoring, the factoring company assumes more of the credit risk for the collection of the invoice. Typically, though, non-recourse is only applicable to a customer’s client who files bankruptcy within a set amount of time from when the invoice was sent.

  • What to watch out for – a factoring company that isn’t upfront about what non-recourse factoring really means. Although it may be to your advantage to find a factor that offers both recourse and non-recourse factoring, a factoring company that has a strong credit team can help ensure that you are working with good customers. This relieves some of the pressure of “being on the hook” for bad debt.

When do you file the UCC?

Some factoring companies will file a Uniform Commercial Code (UCC) for prospective customers as soon as they apply. Others wait to file until they receive a signed factoring agreement. A UCC lien allows the factor to claim what a company claims as collateral. It’s a required step that’s important to secure financing.

  • What to watch out for – A factor that files the UCC as soon as you submit an application. If a factoring company files the UCC early and you decide to do business with another factor, the existing UCC must first be terminated. If you are shopping around for factoring companies, you want to make sure you know when the UCC is filed by each company, so you aren’t blindsided in the final stages of a deal.

Do you have the capital to grow with me?

As your company grows, the funding of invoices should grow with you. Find out as much information as you can about a factoring company’s capital structure and client base. What’s the factoring volume of their largest client? What is a typical account size? Is there a limit to how many debtors the factoring company can take on? Factoring companies that have been in business and have served your industry for several years usually have greater capacity to finance your company as it grows.

  • What to watch out for – newer factoring companies that might not have the resources to fund your invoices as you grow and take on more customers of your own.

What kind of technology do you have?

Some factoring companies make it difficult for you to see your account information. Make sure you can access your account balance, aging and reserve reports online. This is critical information you need to run your business effectively. Also ask how invoices are submitted. Look for a company that offers a mobile solution, so you (and/or your drivers) can submit invoices from anywhere at any time.

  • What to watch out for – a factoring company that requires you to email or mail in invoice documents. This might mean they are lacking the technology that makes the entire factoring process much easier on you.

What’s the application process?

Factoring companies do have some criteria in selecting new clients. Make sure the factoring company explains to you their process for approving you as a client. Is it your personal credit score? Is it the credit ratings and payment histories of your customers? Often, your company wants to factor because it needs a quick injection of cash flow. Make sure the factoring company is clear with you on how many days it will take to review and process your application.

  • What to watch out for – companies that take a long time to approve your application. If it takes this long to get their customers started, will you run into similar issues with funding your invoices in a timely manner?

Research the Company's Reputation

The first place most people turn when researching new companies or services is Google. Since exemplary customer service should be an important part of your factoring experience, be sure to read the reviews for companies you’re considering. Are other current customers satisfied? Are there other things the company does that were part of a good or bad customer experience (think great or subpar customer service, or surprise additional fees)?

Find Out What Other Services They Offer

What makes the factoring fees worth it goes beyond the influx of cash into your account. Having the added back-office support to handle the billing and collections is another huge benefit. Look for companies that also offer additional services such as free credit checks on companies in your industry (e.g. brokers, shippers), access to a fuel card program, technology (e.g. a mobile app, integrated trucking software) and more. Find a factor that gives you what you need to help your company grow and make good business decisions. Remember, when choosing a factoring company, a little research can go a long way toward ensuring your factoring arrangement best serves both you and your customers.

Still have questions or interested in factoring? Contact RTS Financial today.