How to Choose the Best Small Business Factoring Company

A small business factoring company specializes in providing financing to companies that generate less than $30,000 per month. Such clients often include startups, consultants, freelancers, professionals, and very small businesses.

Small businesses are different

The small business factoring market is actually very different from the conventional commercial factoring market. Small business are usually run by an owner and have few, if any, staff. Small companies are more informal than larger businesses. Many don’t always follow the same strict procedures that larger companies follow, especially when it comes to paperwork. As a result, a small business is usually not a good match for a conventional factor.

Conversely, most small business factoring companies are also different from conventional factoring companies. Like their clients, they are often run by an individuals who are supported by a small staff. As fellow entrepreneurs, they understand their clients and are often willing to make accommodations in order to help them. Consequently, small companies should try to work with a company that specializes in financing small businesses.

The right match will help you

Given these differences, it’s important to choose the right factoring company for your business. Working with a large established factoring company may not be the right choice for you. You will be expected to follow their procedures – to the dot. These demands often stress the relationship. More importantly, you will be just a small client lost within the factor’s larger accounts.

However, not every small factor is the same. You need to select your service provider carefully and choose the company that is the best match for you. Follow these steps to select a small business factoring company:

1. Look for candidates

The first step is to look for small factoring companies. This step can be harder than it sounds because companies define “small business” differently. Unless the information is clearly stated on their website (it often isn’t), you need to ask them directly. Also, ask friends and colleagues or search the Internet for companies that work specifically with small businesses. Lastly, assemble a list with a few candidates.

2. Interview prospective companies

The next step is to interview the companies to ensure that they are the right match for you. The following questions help guide you through the process:

a) Do they focus on small businesses exclusively?

The first question to ask is if they focus on small businesses exclusively. You want to work with someone who is comfortable working with a small account but can also handle some larger accounts. This approach helps ensure you don’t outgrow your factor too quickly. For example, if your company invoices $25,000 per month, working with a factor that finances up to $150,000 per month should be fine.

b) Do they charge any application, due diligence, or setup fees?

The application process for a small account is relatively simple, and most factors do not charge any application or due diligence fees. Those that do often charge very small amounts. Be careful of companies that have costly setup fees.

c) Do they have minimums?

Some factoring companies have “minimums” – basically the minimum amount of invoices you have to finance every month (or face a penalty). Companies that specialize in factoring small businesses should not have minimums since small business revenues are often unpredictable.

By the way, the small factor may offer minimums in exchange for a lower price. This arrangement helps reduce your fees as you grow. However, they should offer a plan without minimums as well.

d) Will you interact with an owner or an employee?

One of the advantages of working with a small finance company is that you are able to interact directly with the owner or a direct decision maker. If you are not working directly with the owner, inquire about owner access. If you are not able to access the owner, consider an alternative.

e) Do they have have experience in your industry?
You should work with a factor that has experience in your industry and knows it well. They should know common industry terms, payment patterns, paperwork, and so on. The simple way to find out is to ask them directly. Most will answer the question honestly. If you have doubts, ask deeper industry questions or request references.

3. Select the best candidate

Once you have completed your interview, evaluate each candidate based on their strengths and weaknesses. Select the small business factor that best fits your company.

Be careful about making a selection solely on the cost of service. While rate is an important component of the service, it is not the most important. You are better off with a company that is a good match for your business, can finance your invoices quickly, and knows your industry, even if they are a bit more expensive.

Are you looking for small business factoring?

We are a leading small business factoring company and can provide great service with competitive terms. For a quote, fill out this form or call us toll-free at (877) 300 3258.

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