Invoice factoring is a saving grace for many industries, from transportation and personnel to small and medium-sized businesses, as well as government contractors. In fact, invoice factoring can offer welcome financial relief if you’ve just started a business, have bad credit, can’t get financing from banks, or are at risk of losing your business.
So what should you look for when choosing a factoring company?
Now that we’ve broken down the fees, let’s get into the details. While not all factoring companies are fully transparent with their pricing, Triumph Business Capital believes in being as transparent as possible, from the initial conversation to the financing process.
We believe that getting paid shouldn’t be the hardest part of your job. Since 2004, Triumph Business Capital has helped more than 7,000 small and medium-sized businesses in the United States manage their cash flow.
As your partner, we’ll factor in your invoices so you can get paid today and make your financial challenges a thing of the past. And in addition to helping you manage cash flow through invoice factoring, we offer a number of other business services through our parent company Triumph Bancorp to help you do what you do best.
Triumph Business Capital is committed to helping businesses manage cash flow and more. End concerns about bad debt and slow cash flow problems. Factor your invoices and get paid today with Triumph Business Capital.
How to choose the best factoring company
Selecting a factoring company is one of the most important financial decisions you will make for your company. This article explains everything you need to know to find and select the best factoring company for your business. We cover the following:
- What is a factoring company?
- How does factoring work?
- Factoring with recourse or without recourse
- How much does factoring cost?
- What to look for in a factoring company
- How to find the right company
What is a factoring company?
Factoring companies specialize in financing invoices (that is, accounts receivable). They offer this service because many small and medium-sized businesses cannot afford to wait for the usual 30 to 60 days it takes to get paid. Companies need the funds sooner to pay the running expenses of the company, such as suppliers, payroll, rent, etc.
Factors offer two services that work together: credit review and account receivable financing. The factor reviews the credit of its business clients to determine if they deserve terms of 30 to 60 days. This review allows you to offer credit only to customers who will pay on time. Invoices from customers with good credit can be financed through the factoring company. This service improves your company’s cash flow.
How does factoring work?
Factoring operations have a simple structure. Factoring companies often finance their accounts receivable by purchasing them. Most transactions are financed in two installments. The first installment, called an advance, covers up to 85% of the invoice. The advance is deposited into your bank account shortly after submitting the invoice to the factor.
The remaining 15%, less the commission from the factoring company, is deposited into your account after your client pays the invoice in full. Your client can pay in his usual conditions. Although an 85% advance is common, sectors such as road transport and personnel tend to be entitled to higher advances. This amount is determined on a case-by-case basis.
Factors offer two types of factoring, commonly called “recourse factoring” and “non-recourse factoring.” Each option has its advantages and disadvantages.
To learn more, read “What is factoring?” and “How does factoring work?”
Recourse and non-recourse factoring
The only difference between recourse and non-recourse factoring is the way a customer’s default is handled. In a recourse operation, if the customer does not pay the invoice, you have reimbursed the factor. You can return the advance (plus commissions) or replace the old invoice with a new one.
In a non-recourse factoring operation, if the customer doesn’t pay for an approved reason, you don’t have to reimburse the factoring company. Each factor has its set of approved reasons. In most cases, your client must be bankrupt or closed.
Please note that invoice disputes are not covered by non-recourse contracts. If your customer has a problem with your product or services, you have to fix the situation. Ultimately, if your customer doesn’t pay the bill, you have to reimburse the factoring company.
Most companies assume that non-recourse factoring is better than recourse factoring. This assumption is not always true. Most factoring companies make sure to buy only high-quality invoices. There is little, if any, the chance that they will buy a bill from a bad credit business. Therefore, the possibilities of using the component without recourse are slim. Non-recourse factors also tend to have slightly higher fees. However, non-recourse factoring can protect you against unexpected closings or customer bankruptcies.
To learn more, read “Recourse and Non-Recourse Factoring.”
How much does factoring cost?
Factoring rates are determined based on the dollar amount of your invoices, the total volume of the invoices, your industry and the creditworthiness of your clients. Factoring is a competitive sector and most companies offer a monthly rate of between 1.15% and 3.5%. The rate is usually prorated in the shortest terms. For example, a monthly rate of 1.5% could be quoted and prorated as 0.5% every ten days.
Businesses that want to factor in very small amounts, typically less than $ 10,000, can earn rates in excess of 3.5%. Additionally, construction and medical factoring rates are typically higher due to risk and workload.
To learn more, read “Typical Factoring Rates.”
What to look for in a factoring company
The market is full of factoring companies of all sizes and levels of experience. From a customer perspective, it can be difficult to find and select the right company. Fortunately, a factoring company can be evaluated effectively by asking the following nine questions:
1. What type of factoring do you offer?
Most factoring companies specialize in offering recourse or non-recourse factoring. Some offer both. As we have already said, do not rule out a type of factoring until you clearly understand what it offers and at what cost.
2. What sectors do you work with?
Most factoring companies claim that they can work in most industries. This statement is somewhat true. However, the best factoring companies tend to specialize in a few sectors. Consequently, they are familiar with many great customers and their payment habits. You will do better if you work with a factor that knows your industry well. This point is very important since each sector is different. Many factors only work in certain sectors, such as trucks, personnel, or oil services.
You can determine if a factor is familiar with your industry by simply asking. Examine your answers carefully and look for important details specific to your industry. If you decide to work with the factor, ask them to provide you with customer references. Most factors will be happy to do so during the proposal phase. Obviously, customer references must be from companies in your sector.
3. How long have they been in business?
This question is one of the most important you can ask the factor. The best factoring companies, with few exceptions, have been in the market for more than a decade. This longevity means that they have the long-term experience necessary to manage the accounts during different economic circumstances (eg, recessions, pandemics, etc.). If you think about it, it’s hard to be good at something while also being new to it.
4. What percentage of advance do you offer?
Advance percentages can range from 70% to 95%, depending on the company and the sector. The most common advance percentage is 80% to 85%. Companies in the transport and personnel sector can obtain advances of 90% to 95%. Most companies in the construction sector get between 70% and 80% due to the financial risks of the sector.
To learn more, read “What is the factoring advance?”.
5. What types of factoring do you offer?
A factoring company should be able to give you a price estimate after you provide some basic information. On average, factoring rates range from 1.15% to 3.5% at 30 days. Prices below 1.15% are typically for terms shorter than 30 days or may have other undisclosed costs.
Unfortunately, some factoring companies advertise their prices in such a way that it is difficult to determine the cost of the service. Beware of extremely cheap rates, as they can have hidden costs.
6. Do you have minimums?
In factoring, a “minimum” is the amount you must factor in each period (month, quarter, or year). If your factoring company charges a minimum and you factor less than that amount, you will have to pay the difference.
Some factoring companies offer “no minimum” plans, while others have minimums. Factoring minima are not necessarily bad. You can use the minimums as a negotiating tool to get a much lower rate. However, set a minimum low enough to ensure you are always above it.
7. How quickly can you open the account?
Most factoring companies can open an account for you within 3-5 business days. Larger accounts may take a few more days due to additional due diligence. Unless you need the money urgently, account opening time shouldn’t be an important consideration when looking at factoring companies.
8. Do they offer a good service?
All factoring companies advertise that they offer the best service. Everybody says this, and it means very little at first glance. The only way to determine if a factoring company offers good service is to ask them for references from clients in your industry. Take the time to interview references carefully.
9. How are they financed?
Financing your factor is crucial to the health of your business. Factoring companies that are underfunded may unexpectedly stop financing your bills or cut your line of credit. This has happened to many companies, especially during recessions. The best factoring companies are able to finance a portion of your invoices from their own income. Good factors usually have a bank line of credit, a refactoring line, or funds from individuals.
How to find the best factoring company for your business
The best way to select a factoring company is to follow this process. This worksheet (download) will help you with the process:
1. Select and interview candidates
Gather the names of three or four factoring companies and ask questions based on the information provided in the previous section. Do not interview more than three or four companies at a time as you can easily become overwhelmed.
Continue interviewing companies in groups of four until you have two companies that suit you. Remember: keep track of the numbers. Never interview more than four companies at the same time.
Note: Please note that we also offer factoring services and we would like the opportunity to win your business.
2. Start the application process
Most factoring companies have similar application processes. Depending on the size of your business, you will need to provide certain information about yourself and your business. You also have to provide an invoice aging report.
In some cases, you may need to submit other reports, such as a profit and loss account and balance sheet. Unless your situation is complex, a good factoring company should be able to provide a proposal within one business day.
3. Compare your conditions to determine the best offer
Although the factoring proposals may be similar, they usually present important differences. The structures of the rates, the advances, the terms, the recourse versus the non-recourse, all of this will vary. Some proposals vary in such a way that it is difficult to make a simple comparison. Let me illustrate it with an example, using simple numbers:
Factor A offers a 70% down payment percentage at an interest rate of 3% over 30 days
Factor B offers an advance percentage of 80% at an interest rate of 3.43% for 30 days
Which one costs more for every dollar of funding received? For every dollar, both proposals cost the same. Assessing the proposed rates per dollar is important when comparing the proposals. With this information, you will be able to determine the best accounts receivable factoring company to meet your specific financing needs.
To learn more, read “How to Compare Factoring Companies.”
4. Make the decision
Once the decision is made, the factor issues its legal documents. You have to have them signed and, in some cases, noticed. This process can take a couple of days, although it can be longer in special circumstances (if your transaction is complex).
What happens after choosing a factor?
The last step in the process is “first finance,” in which the factoring company provides its first down payment. The process varies by company, but is generally as follows:
- You submit all invoices to the factor.
- Each of your clients receives a release notification.
- Your invoices are verified.
- The funds are advanced to your account. In most cases, funds are sent via ACH or wire transfer.