The good thing about factoring is that now you can find additional financing for your small business if your local bank is unwilling to provide you with the loan you need to operate.
But there’s catch: commercial factoring companies are so prevalent that it may be difficult to identify which one will work best for your business.
So how do you choose among all the commercial factoring companies out there? Here are some steps you can take:
- Ask around and read newspapers. What you want are authentic factoring companies, especially those with experience in your industry. This means you should ask around your contacts in your industry to see which factoring companies have experience in your line of work. You can also read newspaper accounts of factoring deals in your area.
By asking for recommendations and reading newspaper articles, you get a more objective review rather than simply go by the advertising copy used by these companies.
Your best bets are always the factoring companies who have extensive experience in your industry. You won’t have to explain how your industry works, and the factors already know which of your customers can be trusted to pay in full and on time. You may even benefit from the contacts and knowledge you gain from an experienced factoring company.
- Determine the advance rates and fees. The main advantage of factoring is that you’re more likely to get approval, and the entire application process takes only a day or so to complete. Afterwards, you get a term sheet detailing the advance rates and the types of fees involved.
Obviously, the greater the percentage you get in advance, the better it is for your cash flow. Also, you should compare the fees charged by these commercial factoring companies. There’s a world of difference between a fee of 2% and a fee of 4% of the value of the accounts receivable factored.
You’ll also need to be aware of late fees, especially when your customers have developed an unfortunate habit of paying late.
- Assess the ability of the factors to collect payments. In general, factors are the people who handle the collection from your customers. Factors don’t wait for you to pay them. Instead, they’re paid directly by your customers and they forward the money to you after they’ve deducted their fees.
Unfortunately, a factoring company that doesn’t know how to collect payments properly may screw up your amicable relationships with your customers. The twin goals of payment collection are to get the money and still maintain friendly relationships with customers. But a rather brusque approach to payment collection may do more harm than good.
Ask for references and make sure you bring up this topic when you talk to them. Just how aggressive are their collection methods? How do they plan to communicate with your customers? These topics must be discussed before you sign an agreement with a factor.
If you find a factoring company that’s very professional when they deal with you and your customers, then this is a resource that you should treasure for many years to come.