What to look for in a factor?

Picking the right factoring company is very important.  Unlike most other forms of financing, a factor has a day-in day-out relationship with their clients which means that first and foremost you need to like the people you will be dealing with. As well you will need to trust that they will act in your best interest and provide a quality service to your business. Here are 8 items to consider when deciding if a factoring company is right for you.

Direct lender

First and foremost, make sure you are working with a direct lender. There are many websites that appear to be legitimate factoring companies but they are actually just brokers that will pass off your information for a commission. This is not the worst thing that could happen, but dealing directly with a lender ensures that you can decide what company is the best fit for you. (rather than which company will give the broker a larger commission)

Familiarity with your industry

Some factors specialize in one industry, whereas others deal with all types of businesses. Going with an industry specific factor will ensure that they are knowledgeable in your field. Even if a factor does not specialize, ask if they have worked with businesses like yours in the past. This will ensure that the factor is a good fit for your business and vice versa.

Account management

It is best to have a dedicated account manager. This will make dealings less confusing and more personal as there will be only one person to contact for all of your factoring questions, needs, concerns or issues. As well, you will build a relationship with that person, which means they will be more likely to cater to your needs and will work harder to keep you happy with their service.

Time it takes to disburse the funds

Considering how fast they can respond to requests for funds is important because factoring is about timely cash. If a factoring company cannot get you funds on the same day or within 24 hours, it should not be hard to find one that does. A 2-3 day wait time could be the difference between making payroll on time or not.

Customer relationship management

You have worked hard to build relationships with your customers; you do not want a factor to disrupt this. Ask the factor about their collections policies and how aggressive they are with collections. Some factors will allow their client to handle collections or offer non-notification factoring if this is a concern.

Fees

Every factoring arrangement has factoring fees; they are calculated as percentage of the face value of an invoice. However some factoring companies will charge other ‘setup fees’ or ‘service charges.’ It is probably in your best interest to avoid these factors, or at least to fully understand their fee structure before you commit to them.

Volume requirements

Virtually all factors have a certain monthly volume range that tends to be a guideline for clients they will work with. Some factors will deal with clients that have receivables volumes of $100,000-10 million monthly, and other factors might deal in the $5,000- 100,000 range. Point being it is important to know which factor is suited for your business volume.

In addition, some factors will require their clients to factor a monthly minimum amount of receivables whereas some have no monthly minimums. Choosing a factor with no monthly minimums is the most flexible arrangement as you are not obligated to factor in the event it is not needed.

Contract length

Lastly, some factors require that you have at least a year contract with them. Others offer month-to-month contracts. You should consider how long factoring will be needed for business operations before you commit to contract. If you will need it for well over a year then this should not be an issue, but it is smart to not over commit. Contracts can always be extended, but getting stuck factoring when it is not longer advantageous should be avoided.