Financing invoices is an increasingly popular way to finance a business in Ontario. Unlike most types of bank financing, invoice financing lines are relatively easy to get and offer great flexibility. The problem, however, is that with so many companies offering the service, how do you evaluate which provider is best for your business? This article gives you some basic guidelines on how to evaluate factoring companies in Ontario. Consider these five important points.
1. Do you really need factoring?
This question may sound obvious, but we get calls every day from companies that need funding but would not benefit from our product. Factoring helps companies that have cash flow problems because they are offering payment terms (e.g., net 30 or net 60) to their customers but need the money sooner. If you have this specific problem, then there is a good chance that a factoring financing company can help. If you have another type of financial problem, it’s likely that factoring is not the right solution for your business.
2. Are they a good fit for your industry?
Most factoring providers portray themselves as generalists who can work in almost any industry. While that may be true for large companies, most smaller companies have industry specializations. Some are good at staffing; others excel at oilfield services; and others feel more comfortable with transportation.
Few factoring providers are comfortable and knowledgeable in all industries. Since industry knowledge is a cornerstone in this type of financial relationship, make sure that the providers you are considering know your industry well. It’s a good idea to quiz them on specifics, just to verify their claims of knowledge.
3. Are they a good fit for your sales volume?
Most factoring companies claim that they can work with a wide range of company sizes – anywhere from $10,000 to $10,000,000 in monthly sales volume. While some companies may be able to handle that range of volumes, most have a narrower range in which they are comfortable operating. For some, their average customer may need $50,000 a month. For others, their average customer may require $300,000. Make sure that your providers are comfortable with your sales volume. An old business proverb says that you never want to be a providers smallest – or largest – account. It’s probably true.
4. How long have they been in business?
Although factoring financing has been around for many decades, it’s been a popular form of financing for only the past five to ten years. Consequently, many factoring providers are fairly new companies with limited experience. When evaluating a provider, make sure that they have been in business for at least five years – demonstrating some longevity. If they’ve been in business longer, that’s obviously better.
5. Can they provide references?
Lastly, before you sign on with a particular invoice factoring company, ask for references. Ideally, these references should be companies in your industry with sales volumes similar to your company’s sales volume.
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Disclaimer: This article does not provide legal or financial advice. If you need advice, please consult a professional.