Factoring is a financing method where the finance company called the factor offers a substantial cash advance (usually 80%) of the value of the accounts receivable. The problem is that some business owners choose an accounts receivable factoring company based solely on the fees they charge. But what’s really more important is that the AR factoring companies you should consider should also specialize in your particular industry.
One good example here is medical factoring. Factors who do not have experience in the medical industry may insist on letting customers to pay in 30 days. But that’s not going to happen in the health care industry where the “customers” are mostly Medicaid, Medicare, and private insurance companies. These organizations usually take as many as 90 days to pay up completely, and some insurance companies tend to contest medical bills whenever possible.
This is hard to explain to inexperienced factors, but to those with experience this is a fact of life that’s accounted for in their factoring service.
In the construction industry, another set of rules exist for factoring. In fact, different types of construction projects may have different requirements. For example, financing a directional boring contractor is very different from funding a cell tower maintenance provider even though both belong to the construction industry.
The industry also involves progress payments, which may not be very precise. When a portion of a construction project is completed, then a specified part of the payment is made. This is different from wholesale companies which need to deliver an entire order before a payment is made.
Construction factoring may also involve general contractors and subcontractors, and this is another wrinkle that inexperienced AR factoring companies may find confusing. Sometimes, a subcontractor only gets paid when the general contractor is paid. This is called the “pay when paid” clause, and only an experienced factoring company will know how to deal with this issue properly.
Factoring in the Trucking Industry
Many factors offer credit investigation reports to their clients, and for trucking companies that’s a very useful service. After all, factors set their approval and their rates based on the creditworthiness of your customers. Their findings should be made available to you by your factor, so you know to whom you can extend credit in the first place.
But factors who specialize in trucking should also offer a fuel card program. This offers substantial discounts for your trucking firm. They should also offer fuel advances too, which is a special type of advance on accounts receivables to cover fuel expenses.
When opting for factoring to fund your business, your choice of AR factoring companies mustn’t be based only on how low they charge. It must also depend on the breadth of experience the factoring company has in the industry your involved in. When you deal with an experienced factor, you no longer have to explain things. Instead, the factor may even have ready solutions for your problems.