Factoring is in some ways like a loan, even though technically it’s not. With factoring, you give your invoices to a factor, who in turn advances you a substantial percentage of the value of the invoice. When your customer pays in full in 30 days, the factor then returns to you the rest of the money after taking its fees.
Factoring is like a loan because you get the money you need for your business, and you use your accounts receivable as collateral. With loans you have interest rates, and with factoring you have the factor’s fees in the form of a percentage.
How much you get in advance, the fees charged by the factor, the extra fees you have to pay of your customer pays late, and what happens when a customer doesn’t pay at all, are all covered in the AR factoring term sheets.
You should make sure that the term sheet covers all possible scenarios, so that you always know how much money you will get for each invoice and how much you will have to pay for the factor’s services.
- You need to make sure that have a very accurate idea of how much you’ll have to pay. Sometimes details of the payment scheme can in the fine print, so make sure that payment terms are all laid out clearly. You may end up paying more than 50% in “interest” especially if you deal with an unscrupulous factor.
- How consistent is the percentage of the advance? Some factors may have different advance rates—one invoice may get 90% in advance while another may get 70%. Check to see what things affect this, so that you can offer only invoices which can get high advances.
- You have to know how the factor collects the payments. This is one area in which many businesses are worried about. Many businesses operate by forging good and friendly relations with customers, and sometimes that can change if you have strangers doing the collecting for you. There have been several instances by which factoring can damage or even break such relationships because the factors were too unpleasant or brusque in their payment collection methods. There are several ways for you to get better AR factoring term sheets. For example, you can pick a factor who is already well-versed in your industry so that you don’t have to explain trade SOPs and traditions. You can also make sure that you only offer credit to reputable customers while you maintain an excellent history of providing work and products that are satisfactory for your customers.
- In the end, it all boils down to picking the right factor to deal with, while you also try to be the best factoring client as well. When you’re the perfect client and you have the most reputable factor, you may end up with AR factoring term sheets that are win-win for everyone, including your customers.
- Here, you can perhaps contact previous factoring clients so that you can confirm that the factor won’t alienate your customers.