While factoring receivables is a smart way for a business to raise money, it can also turn into a nightmare if a company chooses the wrong factoring company. Beware of dangling carrots; a bad factoring company can cost a small business money, essential client relationships, and create instability. When a business is desperate for working capital fast, it’s even more critical they make the proper decision in choosing the right factoring company.
How Long Has the Factoring Company Been in Business?
One of the most critical aspects of finding the right factoring company is the amount of time they have been in business. Experience and time spent in a small business specific industry are essential. The more they understand an industry, the smarter and more complex funding deals can be made. Excellent factoring services should have a strong balance sheet and be direct funders. They should be able to offer more sophisticated funding packages, better rates, and lower your overall risks while improving the chances of success.
What are the Terms and Rates or Fees of Factoring?
Depending on the Factoring company, this can be your only fee, or this can be just the fee to cover the factor’s risk and overhead. Make sure to ask the factor when doing your research. This fee primarily covers all of the collections work, including the processing of invoices and collection from your customers, the account debtors. It is typically charged based on the total value of the invoice amount you assign to the Factor. For many factoring providers, this fee also covers the cost of funds for invoice financing.
Factoring rates are based on monthly, quarterly, or seasonal sales volume or cycle. You will see many Factoring providers tout their no minimums policy. However, these are typically at a much higher rate in the factor’s term contracts. Again, it’s essential to ask about the contract terms.
Does the Factoring Company offer Non-Recourse Funding?
Less than 20% of receivable factoring companies utilize credit insurance as part of their factoring package. The non-recourse factoring company must have a strong balance sheet and credit culture to qualify as the large insurers who offer credit insurance have stringent guidelines. Providing credit insurance is not an inexpensive investment. Non-recourse factoring greatly benefits you in lowering your risks of not getting the payment.
Reporting:
The seller will want to know about the reporting practices of all potential factors. How often will the factoring company give updates or notifications of collections and what exactly will those reports include?
Service options:One thing that will separate factoring companies is what other value-added services they are able to provide. Finding out exactly what these are and their costs is an important consideration when choosing a factor.
Paragon Financial was founded in 1994 to provide growing businesses with an alternative to bank financing through Non-Recourse Invoice Factoring, A/R Management, Credit Protection, and Purchase Order Financing. When banks either wouldn’t loan money or offer too little, Paragon steps in with fast and affordable working capital solutions with white glove customer service. With Paragon’s help, you will never turn away a sale or a big order.
- Entrepreneur & Startup Friendly
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- Solutions for Every Industry
- Fundings from $30,000-$10,000,000 per month
- Non-Recourse Factoring with Credit Protection and a Free Credit Manager!
- The Famous “Paragon Soft Touch” with Your Customers
- Up to 90% Invoice Advance vs. waiting 30-75 Days to get Paid
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