How to Select the Best Factoring Company

Selecting a factoring company is one of the most important financial decisions that you will make for your business. It shouldn’t be taken lightly since you will likely be working with the company for a while and your success depends on that relationship.

This article explains everything you need to know so you can shop for the best factoring company for your business with confidence that you will make the right choice.

What is a factoring company?

If you know factoring very well, please skip to the next section. Otherwise, this section will give you an introduction to factoring. A factoring company provides a product called factoring that finances your invoices from commercial or government clients. In most sales, your client pays you in 30 to 60 days. Many businesses cannot afford to wait that long for payment. They need funds sooner to pay suppliers, payroll and other expenses.

Factoring provides the funds you need to meet your obligations and take on new opportunities. Invoices are factored in two installments. The first installment, called the advance, covers 70% – 90% of the invoice value and is funded once the products/services associated with the invoice have been delivered. The remaining 10% – 30%, less a fee, are funded once your client pays the invoice in full.

Factoring is offered in two different varieties called recourse factoring and non-recourse factoring.

Learn more: What is factoring? (in detail)

Recourse vs. non-recourse factoring

The difference between a recourse and non-recourse factoring transaction is fairly simple. In a recourse transaction, if your end-client does not pay the invoice, you have to make the factoring company whole. You can either return the advance (plus fees) or replace the old invoice with a new one. In a non-recourse factoring transaction, if the company does not pay for an approved reason, you don’t have to pay the factoring company back.

Each company has their set of approved reasons. In most cases, your client must be bankrupt or must have closed their doors. Note that invoice disputes are not covered by non-recourse contracts. If your client has a problem with your product or services, you will have to make the factoring company whole.

Most companies assume that non-recourse factoring is better than recourse factoring. This is not always true. There are other features which may be more information, as discussed in the next section.

Most factoring companies are very good at ensuring they buy only high quality invoices. There is little – if any – chance that they will purchase an invoice from a company that has bad credit. Thus, the chances of ever using the non-recourse component are slim. However, non-recourse factoring can protect you against unexpected closures or client bankruptcies.

What to look for in a factoring company

Factoring companies have a number of features and the best ones are competitive across all their features. Here is a list of seven things to look for in a factor:

1. What type of factoring do they offer?

Most factoring companies specialize in offering recourse or non-recourse factoring. Some will offer both. The terms they offer may vary based on the type of factoring they offer.

2. What industries do they work with?

Most factoring companies claim that they can work in most industries. However, the best ones tend to specialize in a few industries. You will do best if you work with a company that knows your industry well. There are two ways to determine this. Ask the sales representative questions about your industry. This will help you determine if s/he is knowledgeable. Then, ask them for client references that are from your industry. Most factoring companies will be happy to provide you with client references once you submit an application and request a proposal.

3. Are their advance rates competitive?

Advance rates can go from 70% to 95% depending on your company and industry. The most common advance rate is 80% – 85%. Companies in the transportation and staffing industries may qualify for rates in the range of 90% – 95%. Most companies in the construction industry get 70% due to the risk of the industry.

4. Do they have minimums?

Some factoring companies offer plans with ‘no-minimums’, while others have minimums. A ‘factoring minimum’ is the amount that you need to factor every period (month, quarter or year). If your factoring company charges a minimum and you factor less than that – you will have to pay the difference. Minimums are not necessarily bad since you can use minimums as a negotiating tool to get a much lower rate. However, it’s best to set a low enough minimum that ensures you are always above it.

5. Is their price competitive?

The pricing you get is based on the average size of your invoices, the total volume you plan to factor and the credit quality of your clients. One average, factoring rates for from 1.5% to 3.5% per 30 days. Prices below 1.5% are usually for terms that are less than 30 days, or may have other undisclosed costs. A number of factoring companies advertise their prices in such a way that is difficult to easily figure out the cost of the service. Be careful of extremely cheap rates as they may have hidden costs attached.

More information about detailed factoring rates.

6. How quickly can they setup the account?

Most factoring companies can setup an account for you in 3 to 5 business days. Larger accounts may take a few days more because of the additional due diligence. Unless you need the money quickly due to a financial emergency, this should not be the most important consideration when you examine factoring companies.

7. Do they offer good service?

All factoring companies advertise that they offer the best service. This is something that everybody says and means very little at face value. The only way you can determine if a factor offers good service is to ask them for client references. Take the time to interview the references carefully.

8. How long have they been in business?

This is one of the most important questions you can ask the factor. The best factoring companies, with few exceptions, have been around for longer than a decade. This means that they have the needed long term experience to manage accounts during different economic circumstances (e.g. a recession) . If you think about it, it’s very difficult to be the best at something while you are also new at it.

9. How are they funded?

How your factor is funded is very important for the health of your business. Factors that are poorly funded may unexpectedly have to stop financing your invoices or cut your credit line. This happened to a number of factoring companies that lost their own funding during the last recession.

The best factoring companies are able to finance a portion of their invoices using their own earnings. Good factors usually have a bank line of credit, or funds from private individuals.

How to find the best factoring company for your business?

The process is broken down in the following steps:

1. Select and interview the candidates

Collect the names of three to four factoring companies and ask questions based on the information provided in the previous section. It’s important that you not interview more than three or four companies at the time – you can easily become overwhelmed. Also, please remember that we offer factoring services as well and would like the opportunity to earn your business.

Continue interviewing companies in groups of four until you have two companies that are a good match for you. It’s important to keep control of the numbers. Never interview more than four companies at a time.

2. Start the application process

Most factoring companies have similar application processes. Depending on the size of your business, you will need to provide some information about yourself and your company. You will also need to provide an invoice aging report.

In some cases you may need to provide other reports such as a Profit and Loss Statement and a Balance Sheet. Unless your situation is complex, a good factoring company should be able to provide a proposal no later than a day later.

3. Compare their terms to determine the best deal

Although factoring proposals can be similar, the usually have differences. Rate structures, advances, terms, recourse vs non-recourse, will all vary. Some will vary in ways that make it hard to do a simple comparison. Let me illustrate with an example, using simple numbers:

  • Factor A provides a 70% advance rate at a 3% thirty day rate
  • Factor B provides an 80% advance rate at a 3.43% thirty day rate

Which one costs more per dollar of financing received? You will need to compare both companies and their proposed rates. With this information, you will be able to determine the best receivables factoring company to meet your specific funding needs.

4. Make the decision

Once you make the decision, the factor will issue their legal documents. You will need to get them signed and in some cases notarized. This can take a couple of days, though it may take longer in special circumstances (such as if your transaction is complex).

What happens after you choose a factor?

The last step in the process is to go through first funding, which is when the accounts receivable factoring company gives you your first advance. The process varies by company, but in generals it goes like this:

  1. Submit all invoices to the factor
  2. Each customer receives a Notice of Assignment
  3. Your invoices are verified
  4. The funds are advanced to your account. In most cases, they are sent using an ACH or a wire transfer

Can we earn your business?

We can provide factoring lines with high advances at low rates. For more information, get an online factoring quote or call (877) 300 3258.


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Disclaimer: This article is for informational purposes only. Looking for a factoring company and applying for factoring services is a complex matter. Seek legal and financial advice.