How to Choose 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 the confidence that you will make the right choice.

What is a factoring company?

If you understand factoring well, skip to the next section. Otherwise, this section provides 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 – the advance – covers 70% to 90% of the invoice value and is funded once the products/services associated with the invoice have been delivered. The remaining 10% to 30%, less a fee, is funded once your client pays the invoice in full.

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

Learn more: What is factoring? and What is a factoring company?

Recourse vs. non-recourse factoring

The difference between a recourse and non-recourse factoring transaction is fairly simple. In a recourse transaction, if your 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 do not have to repay the factoring company.

Each company has its set of approved reasons. In most cases, your client must be bankrupt or must have closed its doors. Note that invoice disputes are not covered by non-recourse contracts. If your client has a problem with your product or services, you 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 to consider, as discussed in the next section.

Most factoring companies are good at ensuring they buy only high-quality invoices. There is little – if any – chance that they will purchase an invoice from a company with 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 companies are competitive across all their features. Here are 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 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 helps you determine if the company is knowledgeable. Then ask them for client references from your industry. Most factoring companies are 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 range from 70% to 95% depending on your company and industry. The most common advance rate is 80% to 85%. Companies in the transportation and staffing industries may qualify for rates in the range of 90% to 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 must pay the difference. Minimums are not necessarily bad since you can use minimums as a negotiating tool to get a much lower rate. However, set a minimum low enough to ensure 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. On average, factoring rates range from 1.15% to 3.5% per 30 days. Prices below 1.15% are usually for terms less than 30 days, or they may have other undisclosed costs. Some factoring companies advertise their prices in a way that makes it difficult to determine 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 set up the account?

Most factoring companies can set up an account for you in 3 to 5 business days. Larger accounts may take a few more days because of the additional due diligence. Unless you need the money quickly due to a financial emergency, account setup time 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. Everybody says this, and it means very little at face value. The only way to 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 questions is one of the most important ones you can ask the factor. The best factoring companies, with few exceptions, have been around for longer than a decade. This longevity means that they have the long-term experience necessary to manage accounts during different economic circumstances (e.g., a recession). If you think about it, it is 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 crucial for the health of your business. Factors that are poorly funded may have to stop financing your invoices unexpectedly 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 includes the following steps:

1. Select and interview the candidates

Collect the names of three or four factoring companies and ask questions based on the information provided in the previous section. Do not interview more than three or four companies at a time – you can become overwhelmed easily. Also, keep in mind 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. Remember – 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 need to provide some information about yourself and your company. You 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, they 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% 30-day rate
  • Factor B provides an 80% advance rate at a 3.43% 30-day rate

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

4. Make the decision

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

What happens after you choose a factor?

The last step in the process is the “first funding,” in which the factoring company provides your first advance. The process varies by company, but in general it goes as follows:

  1. You submit all invoices to the factor.
  2. Each of your customers receives a Notice of Assignment.
  3. Your invoices are verified.
  4. The funds are advanced to your account. In most cases, the funds 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.