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Invoice Factoring and Questions to Ask

Question Mark and Word on ChalkboardIf you are considering factoring your accounts receivable invoices, you are probably already aware of the many benefits a factoring company can provide your business. But before you sign a contract with an invoice factoring company, it’s important to understand that not all factoring companies are equal. Not only does each company have its own unique operating philosophy, but some have significantly more experience than others. Some factors are large and institutionalized, while others may be too small to handle your needs.  Even with the same end goal in mind, every invoice factoring company is distinct. As a business owner, it is in your best interest to find the best possible factoring company that will work collaboratively with you to achieve ultimate success.

Before signing a contract with an invoice factoring company, make sure to ask the following questions:

How many years have you been in business? Accounts receivable financing has been around for many years. But it wasn’t until recently that the popularity of invoice factoring has grown substantially. One of the primary reasons for the increase in popularity of invoice factoring is that more and more business owners are realizing that it’s an excellent option for quickly raising working capital without the need to take on unnecessary risks. Unfortunately, however, with the increase in popularity of invoice factoring, many new and inexperienced invoice factoring companies have recently opened their doors for business. The problem is that many new invoice factoring companies lack the knowledge and experience that more established invoice factoring companies have. If you are considering signing a contract with an invoice factoring company, make sure to take into consideration the number of years the company has been in business – and how many clients they have assisted since they’ve been open.

Are you dealing with a real factor, or an intermediary? A majority of the “factoring companies” you might run into are really just intermediaries.  They may be strictly brokers, or they may act like a factor but have little or no funds of their own to work with.  In either case, your “factor” can’t make its own decisions, but must follow the dictates of its funding source.  Always deal with a principal (i.e., a real factor) using its own funds and making its own decisions.

What are your rates? What are your fees? How do you charge for your services? The topic of rates, fees and service charges can get complicated and confusing. Basically, a factoring company should only charge you what is called a “discount fee” or similar on the invoices it factors.  Be on the lookout for a multitude of other fees, hidden and otherwise, which may be charged.  These other fees and charges allow less scrupulous factors to offer you what seems to be a lower nominal rate, but whose charges will really be more.  It’s best to select an invoice factoring company that provides you with an easy-to-read and easy-to-decipher contract that provides you with specific details and information about rates, fees and service charges. If you are confused about how much you will pay to factor your accounts receivables, don’t sign the contract! Make absolutely sure there will be no hidden fees that will surprise you at any point during the term of your contract.

Do I have to factor all of my invoices, or can I factor just a few select invoices? This is an important topic to discuss with all invoice factoring companies that you are considering. If your business is new to the world of invoice factoring, you may not need to factor as many invoices as you might initially believe. Conversely, you might end up wanting to factor more invoices than you originally thought you should. No matter the case, it’s important to know the minimum number of invoices you must provide to the invoice factoring company per month.

Do you have experience with accounts receivable factoring in my specific industry? While the overall goal of all factoring companies is the same (e.g. to collect the balance due on unpaid invoices), it’s beneficial to contract with a factoring company that has experience working with businesses in your specific industry. A high level of experience dealing with specific industries means the factoring company will better understand your customers and will know how to best work with them.

21501427_xs_resizedApplying to a factor seems harmless, but is it?  If you submit an application to some invoice factoring companies, you may find a UCC-1 (a security interest) filed against your company.  They do this so that you won’t then apply to another factor, although this practice may not be ethical.  Don’t sign or submit an application if it authorizes them to file a security interest on your company.

Do you have professional references? The most promising invoice factoring companies will be able to provide you with ample references from their current and/or past clients. Make sure to spend a bit of time contacting the references you are provided. Ask questions such as: 1) How long have you been factoring your accounts receivable invoices? 2) How has invoice factoring helped your business? 3) Would you recommend your invoice factoring company to a business owner such as me?

Making the decision to hire an invoice factoring company is an important step towards the financial success of your business. It’s important that you make the best possible decision when determining which company to use. Remember, there are many invoice factoring companies out there – and you want to select the one that will work best for you and your unique business situation.

Editor’s Note: Greg Curtiss is President of The Invoice Bankers. Mr. Curtiss previously was a lawyer and has passed the CPA exam. He has been in business for over 25 years. You can reach him by calling 303-740-7600 or 1-888-740-1750.