How to Get Better AR Factoring Term Sheets

Click for a factoring term sheet
Click for a factoring term sheet

If you’ve been turned down by banks on several occasions, an accounts receivable factoring company can be a lifesaver. But you may not like it when you get the AR factoring term sheets they offer. You can do yourself (and your business) a favor by negotiating the term sheet so that you can get a price concession while providing them with what they need to justify their investment.

Here are some tips you need to keep in mind:

Find a Factoring Company that Specializes in your Industry

Each industry has its own regulations, customs, and realities, so you need a factoring company that fully understands how your particular industry operates. That saves everyone a lot of time, and you don’t have to explain why some things are practiced in your industry.

If a lender is already familiar with your industry, then you stand a better chance of getting better terms. The factoring company already knows the risks involved and they will be more likely to offer a better price.

Understand What a Factoring Company is Looking For in a Client

Essentially, a factoring company wants a client who offers them a very low risk with high rewards for their investment. The variables they are looking for will include:

  • Good invoice practices
  • A history of delivering good work
  • An acceptable record in making profits
  • Reputable customers
  • Increasing funding requirements due to growth

Offer a Profile or Summary of your Company

Whether or not a factoring company requires this document, you ought to submit one anyway. It’s not really a lengthy document, as a single page should suffice. The information in the summary should be concise, and of course it has to be factual. It has to answer the following questions:

  • What is your company all about? What does it do?
  • What are your invoicing procedures?
  • What are your funding requirements?
  • What is the outlook for your company in particular, and your industry in general?

The point of the summary is to put your company in a positive light. You can then lower the perceived risk of financing your company by providing the info they need. Don’t include false information, and don’t exaggerate. They will find out and that leads to worse rates.

Manage Your Expectations

One of the most important variables that a factoring company looks for is the volume of invoices you want to factor. When you increase the volume, you can then pay less for every dollar you get in financing. A low risk company with a low volume of invoices may actually have to pay higher rates than a medium risk company with a high volume of invoices.

In short, you can’t just demand better AR factoring term sheets as a matter of course. Factoring companies have their own guidelines, and making unreasonable demands may simply cause you to lose the financing assistance you need. Your responsibility is to make sure that you present the evidence factoring companies want to justify better terms.