This is a vitally important consideration that is often overlooked. While invoice factoring is at its core an exchange of money for invoices, the “how” of that transaction can be quite different from industry to industry. If your factoring company is unfamiliar with billing terms, approval processes, and other nuances of your industry, it can hamper your ability to get paid correctly and on time. Expertise is a very important but underappreciated commodity with a factoring company.
While every company that offers invoice factoring offers a largely similar service to every other invoice factoring company, not every factoring company is the same.
On the contrary, there are substantial differences between companies that can affect your business in important ways. So, before you settle on choosing the right factoring company for your business, here are a list of important things that you should consider when choosing a factoring company.
Every business has different financing needs. Some business owners appreciate the convenience of factoring enough that they use it for years. Other businesses only want to factor for a short period of time, just long enough to establish a stable cash-flow. If the factoring company you are considering has a long contract length, it can be a headache to leave once you are ready to move on. A business should always understand how long they are committing to work with a factoring company before deciding who to work with.
One of the things that can really structure a businesses relationship with their factoring company are the contract terms. These things include advance rate, rebate, reserve requirements, minimums, recourse or non-recourse, and more. Each of these has an impact on how a business operates and so must be taken into account when deciding on which factoring company to sign on with.
This is usually the main question that most businesses consider. For very good reason – how expensive it is to factor is vital to understand when deciding which company to use. It is also important to figure out how their rate is structured – is it a flat rate or does it go up over time? Discerning the actual cost of factoring might take some careful math depending on how the rate is structured.
Another important, but infrequently asked question, is what fees exist outside the base factoring rate. Occasionally, factoring companies will lure clients in with exceptionally low rates only to make it up with a myriad of fees. Fees can add up and make factoring much more expensive than a simple, if slightly higher, rate without fees. It is important to get a listing of all the fees up front so you get a sense of the real cost of factoring with any particular factoring company.