A top factoring company can be of immeasurable assistance to a small business, and many businesses in fact get their financing from these kinds of lenders than from banks.
Factoring in itself is a really viable option. You simply exchange invoices for advance payouts. For example, the factor gives you an 80% advance for the invoice, which you can then use to pay suppliers, payroll, and utilities. You get the rest of the payment when the customer pays, and the factor deducts its fees from the amount.
But the quality of the factoring company is crucial for this alternative to work. That said, here are some signs that the factor you are dealing with is a top factoring company:
- Easy and fast application process. The very short time it takes for you to get your funding is one of the more obvious advantages of factoring, but some factors are faster than others. Most factoring companies take a week to determine if your invoices meet their standards. Others only need a day or two. If you’re getting antsy because the payroll date is fast approaching, even the difference of a few days can be crucial.
- Bigger cash advance. This is the bulk of the financing, so its importance cannot be understated. Some companies offer 80% of the value of an invoice, and that’s usually considered the industry average. But others may offer up to 90% of the value, and some even offer 95%.
- Competitive rates. While factoring is not technically a loan (which means you don’t pay interest), you’ll still need to pay certain fees. Many factoring companies charge setup fees, and it can reach as high as 6% of the value of the invoice. Then there are also fees that need to be paid when your customers don’t pay promptly.
These fees can eat up your profit margins, so less is always better.
- Extensive experience in your industry. The best factoring company may not be the best for you if they have no clue as to how your particular industry operates. But experienced factoring companies are already up to speed about who the major players are and how the supply line works. They know about your unique needs, and they already have the basic plans in place to help you.
- Wide range of services. The services you get aren’t limited to just the financing. For example, factoring includes debt collection. The factor takes up this task itself. Other services which you may need include credit investigation for your new customers, invoice and payment processing, accounts receivable bookkeeping, and web-based reporting.
- Few contractual obligations. Some factors require a lockup contract with them for a year or even two years, which may not be exactly what your company needs. But other factors are more flexible and will only provide their services as needed.
When selecting the top factoring company, you should get an accountant involved on the matter who will help negotiate the terms and ensure you are not missing any important details. You also need a lawyer to make sure you understand the terms of the factoring contract.
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