Every prospective client wants it – better factoring rates. However, most prospect go around the process of negotiating rates wrong way, they just demand a better term sheet and try to strong arm the factoring company into agreeing.
While making demands for better terms may work at times, it’s not a good strategy for long term success Furthermore, it can lead to a rocky start to the new factoring relationship.
A better strategy
There is a more effective way to negotiate for price reductions. It’s simple: look at what the factor wants and try to give it to them while asking for a price concession. Just like any negotiation.
Let’s consider what a finance company is looking for. They usually want clients that:
- Have good invoicing practices
- Have solid customers
- Deliver good work
- Have a solid track record in business
- Have solid and increasing funding requirements (a growing business)
- Want to factor a high volume of invoices
Factoring company rates and advance terms will be based on their perception of how your company meets these six criteria (and any other criteria they have). You stand a better chance of getting what you want by showing the factor how you meet these criteria while being a low risk client.
Start with an executive summary
Every application should include an executive summary of your company, even if the factor does not ask for it. The objective is to provide the factoring company with a your view of your company. The summary does not have to be longer than a a page and you can easily cover the most important points by using the following headings. Obviously, you need to fill out the details for your own company:
- Company Summary/Profile
- Customer Profiles
- Invoicing Procedures
- Funding Requirements
- Company Outlook
Be sure that your information is clear, concise and to the point. Always be factual and only include things that can be backed up by evidence. This will help in the evaluation of your company. Also, do not exaggerate things or include inaccurate/false information. There is a strong chance the finance company will catch it and this will impact your terms negatively. Honesty is always the best policy.
Volume is an important consideration
The executive summary allows you to position your company with the factor in a positive light, making sure that the underwriters get to hear the story from you. The second most important variable is volume – basically how much do you want to factor on any given month. Like many businesses, invoice financiers work on a volume model. The higher your volume, the lower your price per dollar. Unfortunately there is little that you can do about this.
This is an important thing to keep in mind because a client with a medium risk portfolio but a high volume may get lower rates that a low risk client with low volume.
Lower your costs by working with a specialist
You are likely to get better rates if you work with a finance company that specializes in your industry. Few people consider this when looking for a factoring company, but it is very important. A specialist knows your industry, understands it risks and knows how to price a proposal accordingly.
Putting it all together: negotiating for better rates
The way to negotiate the best possible rates it to do three things:
- Lower your perceived risk by creating an accurate but compelling executive summary
- Set realistic factoring volume requirements (don’t over or under estimate)
- Look for industry specialists rather then generic factors
You are now in a position where you can present a strong application to a factor – or factors – who know your industry and are in position to offer the competitive rates.
One last word – why strong arming won’t work
Most factoring companies are looking to grow, and they can only grow by financing as many deals as possible. However, they have strong internal controls, done by separating the sales and underwriting departments., to protect themselves against mistakes. Making the wrong choice could lead the factor to lose it’s financing. No amount of strong arming will get you past that.
A better strategy is to work on minimizing the risk (and cost) of your opportunity to the factor, and focus on working with factors that are aligned with your type of business.