Release Working Capital with Invoice Factoring
Invoice factoring is a great way to release the working capital tied up in your sales ledger. But all invoice factoring companies are not the same. Indeed, some invoice factoring companies work on significantly different terms and conditions than their competitors. And, of course, some factoring companies have better reputations than others, too. So, before you dive headlong into an invoice factoring arrangement, read these crucial points to consider when choosing the best factoring company for your business.
1. What Types of Invoices Will the Company Factor?
Some factoring companies will not process certain types of invoices. For example, invoices for payments in advance or deposits might be excluded from an invoice factoring agreement. And invoices for annual support fees or subscriptions might be an issue with some companies. So, it is best to be clear about the nature of your invoices when talking to factoring companies to avoid any surprises later.
2. What Are the Factoring Rates?
Factoring companies charge interest on the advances they make to you. Those rates will vary but are generally between 1.15% to 3.5% for every 30 days outstanding. When comparing factoring rates, though, you must also look at other charges that may be levied. Some companies advertise low rates but make up the difference with additional fees.
3. What Advance Percentage Will You Receive?
The advance percentage refers to the initial proportion of each sales invoice that the factoring company will advance your business. The balance is paid to you when the customer settles the invoice. This advance is usually between 70% to 95% and will depend on the type of industry and your company history. However, some factoring companies are more generous than others with their advances. So, this is one aspect of factoring agreements that you should compare when shopping around for the best factoring company.
4. Is There a Minimum Value?
Some factoring agreements stipulate the minimum total face value of invoices passed through the factoring company every month or quarter. And, if you fail to hit that minimum figure, you may be charged an excess charge to make up for the difference. On the other hand, some factoring companies offer “no-minimum” agreements with no such limits. Like all variables in invoice financing agreements, the minimum value is usually up for negotiation. However, a low or no-minimum deal may cost you slightly more.
5. How Quickly Are Funds Made Available?
Two critical questions fall under this heading. The first is how long it will take to set up the account and how long before receiving the first tranche of financing against outstanding sales invoices. The second question is how quickly you will receive the advances against your new invoices. Most factoring companies will set up an account and process outstanding invoices for payment in around 2-7 days. And you can expect to receive advances against new invoices in 1-2 days.
6. Recourse or Non-Recourse?
There are two fundamental types of factoring arrangements, and they are referred to as recourse and non-recourse agreements. In a recourse agreement, the non-payment of a sales invoice will ultimately result in the invoice being charged back to the issuing company. In a non-recourse agreement, on the other hand, the factoring company agrees to bear bad debts. However, non-recourse agreements usually only cover the non-payment of invoices due to bankruptcy or the customer ceasing trading, not general invoice disputes. And, of course, a non-recourse factoring arrangement will be more expensive than a recourse agreement because the factoring company must provide for bad debts.
7. Does the Company Have Experience in Your Sector?
Some factoring companies specialize in specific industry sectors, while others service all industries. While experience in an industry is not essential, it can be beneficial. If a factoring company understands your business, they may offer services tailored to the sector in which you operate. And, if a company specializes in an industry, they may already have built relationships with some of your customers. Industry specialization may also be advantageous if your requirements are non-standard. If that is the case, an industry-specific factor will have dealt with similar situations before.
8. How is the Factoring Account Administered?
You will likely be dealing with your chosen factoring company every day. New invoices will need to be submitted for financing, there might be queries raised on some of those invoices, and there will also be the late payers to be discussed. So, it is advisable to ask how these day-to-day tasks will be administered. For example, will you have a single account manager assigned to you? What is the process for submitting invoices? And does the company offer an online account management portal?
9. How Well-Established is the Factoring Company?
There have been occasions when factoring companies have gone out of business, leaving their clients with an instant cash flow problem. So, it is advisable to do some background checks before signing up with a factoring company. For example, how long has the company been in business, and how is it funded? And, it is a good idea to ask for references from customers in your sector and research online reviews of the company.
10. Can You Work with the People?
A final, crucial consideration when selecting a factoring company is the people. Because, unlike most other finance providers, you will need an excellent day-to-day working relationship with a factoring company. Indeed, getting the factoring deal that you want is only the beginning. You will then have to work daily with your factoring company. And, your customers will have contact with the factor’s team, too. So, it is essential that you feel confident that you can work in partnership with your chosen company.
The Bottom Line
Selecting a factoring company for your business is a big decision. So, it is advisable to do your due diligence before choosing the factoring company that is best for your organization. The best factoring companies will work with you to find an arrangement that suits both parties.
Your Questions Answered Quickly
Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.
About Universal Funding
Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.