5 Things to Consider When Choosing an Accounts Receivable Factoring Firm

Although accounts receivable factoring is a great way to ease cash flow tensions, working with the wrong factoring firm has the potential to add an entirely different kind of cash flow pressure to your company’s operations.  There are literally thousands of factoring firms to choose from, so it is extremely important to know what to look for and what kinds of questions to ask in order to find the best fit for your business.  This article discusses five things every business owner should consider when choosing an accounts receivable factoring firm.

One: Industry Expertise

Factoring firms come in all different shapes and sizes, so the first way to narrow down the playing field when choosing an accounts receivable factor is find one who understands your business model and the industry in which you operate.  Partnering with an accounts receivable factor who understands the unique characteristics of your business ensures that the ongoing factoring process will run smoothly.  Instead of wasting valuable time explaining industry jargon, traditional payment terms and/or day-to-day business procedures to a factor that is unfamiliar with your company’s business model, selecting a funder that already knows your industry allows you to focus your attention on more important matters—like growing your business.

Two: Flexibility

The second thing to consider when shopping factoring firms is the amount of flexibility it offers to its clients.  A smart business owner should be sure to ask some or all of the following questions to potential factoring candidates:

• Is there a specific length of time that I’m required to remain in the factoring relationship? 


• Do I have to sign a personal guarantee, whereby I would be held personally responsible for any unpaid invoices?


• Am I required to sell all of my invoices?


• Do I have to factor invoices for all of my customers?


• In the case of a business just starting up: Is there a minimum amount of invoices I need to factor?  And if so, what are the penalties involved if I do not meet the minimum requirements?


• In the case of a business who is growing rapidly: Is there a maximum amount that I can be funded?

Although there are some factoring firms who will answer NO to all of these questions, many will not.  It’s important for business owners to know the level of flexibility their intended factoring company offers so they won’t be surprised when these questions could potentially arise later on in the factoring relationship.

Three: Customer Service

In the business world, time is money.  Having to navigate through an impersonalized phone system and being placed on hold for long periods of time is a big waste of time that can easily be avoided from the get-go during the researching phase of selecting a factoring company.  A good factoring firm is one who is available when its clients need them.  Pay attention to response times for both email and telephone communications during the sales process. Take note of who responds to your inquiries as well.  For example, some factoring firms assign personal account managers to each other its clients, whereas other companies have a team of employees handling each client’s account.  Regardless of how many people are working to fund your business, make it a priority to choose an invoice factoring company who offers a level of customer service that you desire.

Four: Stability

More than ever, it’s important for business owners to secure funding from an established invoice factoring company.  Earlier in this article, I stressed the value of finding a factor who understands your business model.  It’s just as important to work with a factoring firm who has a reliable track record in the factoring industry.  One way to accomplish this task is by choosing a factoring firm who is affiliated with the International Factoring Association (IFA).  Factoring companies who are members of the IFA adhere to a strict code of ethics and business practices.  Business owners interested in finding a trustworthy factoring firm can peruse a list of factors via the IFAWeb site by using the organization’s “Factor Search” feature.

Five: Pricing

Before jumping in blindly and talking numbers, it’s a good idea to have a general understanding of how factoring companies structure their fees.  When a factoring firm advances money on receivables, it is actually making a legal purchase of the invoices at a discounted rate.  This discounted rate can be a one-time flat fee, or it can vary depending on how long the factor owns the invoice, whereby the factor charges a certain percentage corresponding to the amount of time that it takes for the invoice to be paid.  In general, discount fees can be affected by a number of things, including the contractual commitment, the average monthly purchase volumes, the average size of the invoices sold, the number of account debtors (customers) that will be factored and the credit quality of those debtors.  Variations in each of these will lead to potentially substantial changes in the fee structure. 

There are numerous other possible fees that a factor could tack on for additional services, such as charging extra to cover the costs of running credit and background checks on account debtors, compiling and shipping legal documentation and filing liens.  Some factors will add administrative fees for postage, long-distance phone calls, or computer time.  There are also fees associated with funding procedures, identifying set prices for a same-day wire or an overnight transfer of funds.  There is also another class of costs that can be bundled into a “penalty fees” category, in which a factor could charge for misdirected payments, aged invoices or an early termination of a contract.

Of course there are even more variables to consider when choosing a factoring firm that could not be explained adequately in this article because of constraints on space.  Just remember that there are a lot of factoring companies out there, each with their own unique practices and policies.  It’s important to weigh the options of the all-encompassing package of what each factor has to offer before making a final decision.  During your researching process, be sure to consider the five criteria shared within this article.