How To Chose The Best Factoring Company

Invoice Factoring Group

The market is full of factoring companies that promise very low rates, excellent service and high advances. Making a choice from among all the options can be a daunting task for a business owner that needs financing. This guide will help you go through an easy to implement process to help you figure out which factoring company is the best one for your business.

First things first. Does a factoring company offer the right solution for you?

This may seem like an obvious point, but many factoring prospects actually don't understand invoice factoring and aren't sure if it's a right fit for them. They spend a lot of time evaluating companies only to find out that they don't have a good product fit.

Before starting the search process you should determine if factoring is right for your company. Generally, an invoice financing company can help you if your company can't afford to offer payment terms to its customers and has cash flow problems because of it.

What to look for in a factor?

Although most factoring companies will promote themselves as being generalists that can work any deal, the reality is that most factors have areas of specialty and opportunity preferences. Your best bet is to work with one who is the most aligned with your business. Here are some things to look at:

How long have they been in business?

This is a very important questions that many prospects forget to ask. You want to work with a factor that has some industry track record, ideally three years or more. Five years in the industry is obviously better. Working with a company that has operated for less than three years can be risky since they don't have enough of a track record to determine if they are good - or not.

What is their deal size range?

Most companies usually advertise that they can work with companies of all sizes. While some companies can actually do this, the fact of the matter is that most have a preferred size range. The easiest way to learn the preferred deal size is to ask your representative directly. They will often tell you. If they insist that they can work with companies of all sizes, and some can, be sure to ask for the right references (more on this below).

What is their industry preference?

Just like with deal size, many providers have industry specialties. Even most generalists will prefer certain industries, or industry types. Again, the best way to find out their industry preference is to ask. They will often tell you. Obviously, you want to select a factor with experience in your industry or a similar industry.

What contract terms do they offer?

Here is when you start getting into the details of the negotiation process. You need to get an idea of their rates. However, the rate alone does not paint a complete picture. You also need to know other important details such as their advance percentages, additional fees and other terms. Things can get confusing because most companies list their contract terms in their own specific way. For example, one company may offer a 1.5% rate for every 15 days. Another may offer 1% for every 10 days. Which one is better? It depends. This is a simple example, but full fledged proposal can have some many variables that makes an equivalent comparison almost impossible.

Their is a simple solution though. Once you have gone through the proposals, select a type of proposal you like and then ask the other companies to match the format. For example. if your preferred proposal uses a 10 day fee, ask all companies to resubmit their proposals using that format. It will make your decision process easier.

Obviously this is the time when you start negotiating to try and get the best rates.

Can they provide you with references - in your industry?

You should always ask for references - and be sure to call them. But don't fall for the trick of accepting any references from your provider. Ask them to give you references from companies that are in your industry and have a similar sales volume to your company.

Evaluating proposals

One of the biggest mistakes that prospects make is trying to submit a dozen applications hoping to get the best possible deal. The bad news is that this approach seldom works. It often wastes a lot of time - mostly yours - and does not yield good results. A better approach is to interview a number of factoring companies and then select the top two or three contenders. Submit those applications only, but keep the other company names (just in case). When submitting applications, consider using this strategy and avoid these mistakes.

Ask the providers to submit their proposals in a common format that uses a similar pricing model. This will allow you to do a true side by side comparison. Then, select the best alternatives and call their references. By the way, when calling references, be sure to be polite, professional and respectful. Prepare your questions before calling and keep the call short since they are busy people - like you.

With this information on hand - make a decision. Lastly, you should consider enlisting the help of a financial and/or legal professional. Financing term sheets and contracts can be complex and their help can be invaluable.

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