Important Questions to Ask Before Accepting a Business Factoring Deal

Business Factors
Business Factors

If you’re planning to factor in your account receivables, you probably know its benefits. However, other things are essential to know before signing on the bottom line. First, you need to know that not all factoring companies are the same. Every factoring company has its own requirements and procedures, but some have vast experience in some industries and factoring techniques than others. Here are some of the questions you must ask before signing a business factoring contract.

How many years has the factor been in the industry? 

Over the years, the factoring business has expanded considerably since more people are embracing factoring as a perfect technique for increasing business cash flow. Nevertheless, with the increasing popularity of receivable factoring, most inexperienced and new companies have appeared. Make sure you know the level of experience of any factoring company. If the factoring company is newer in the market, what factoring experience the workers had before joining the company?

Is the factoring company an intermediary or someone who will offer your cash?

A high number of companies in the factoring field today are intermediaries and not factors. These firms may be brokers attempting to attract clients for other companies. Some firms act like they are the factoring company, but in reality, they’ve little or no funds of their own to purchase invoices. The potential issue with such firms is that they can’t make their decision and have to follow the dictates of the funding partners.

Nevertheless, don’t make any mistakes. Working with a broker might be a good choice, provided they present their entity as being an intermediary and not an actual funding company. Good brokers will have many good factoring companies to whom they refer clients but will tell you quite early that they’re not the funder and will link you with a factor that is a perfect match.

What are the company’s discount terms, fees charged, and any hidden charges?

Good Business Factors make their income from the discount terms they charge and no hidden charges. Even though some things like wire charges, application fees, and other fees are common and always act as a reimbursement for the Business Factors’s out-of-pocket costs, be aware of unusually high fees of these common charges. Some factoring companies brag about offering low discount rates but end up overcharging for these fees. This makes the cost of business factoring higher than those factors with reasonable charges.

You are better off finding a business factor with an easier-to-read contract with precise, understandable wording about their rates, service charges, and fees.

Do they have vast factoring experience in your unique industry 

Unless the company specializes in a specific field, many Business Factors accept customers from various industries. It’s to your benefit to find a factoring company that has worked with other firms in your field; previous experience will assist them in understanding your business and clients better. Nevertheless, choosing your factor shouldn’t be the only determining aspect. Good factoring companies will quickly learn about your area of specialization.

Can I factor in a portion of chosen clients or invoices, or must I factor in everything?

This is one of the important things to discuss. Sometimes you might want to factor in most or all of your invoices, but other times you may only need to factor in a few chosen clients or invoices. Whichever way, you require that freedom and flexibility to choose how much you should factor. It’s vital to ask the factoring company about the least number of invoices to be factored each month. Some Business Factors will want you to factor in all your account receivables, especially if you are a small or mid-sized company.

Finding the right business factoring company for your business is a vital decision toward achieving financial success. It is critical that you make the best decision. Since factoring is a long-term partnership that two businesses share, you’ll want it to be positive for every party involved.