For businesses experiencing major growth or change, sometimes the need to access funds emerges faster than accounts receivable can keep up. To avoid the cash flow problems and subsequent business failures that such a situation can create, many businesses turn to factoring. This is the practice of selling your unpaid invoices to a third party (called a factor), who pays a percentage of the value, and then later collects the payment from your customer directly.
Once you’ve decided that factoring is the solution for your cash flow needs, it’s time to choose the right partner for the task.
To help you in this effort, here are the top four things to consider when choosing a factoring partner:
1. The type of factoring service offered
There are two major paths that factoring generally takes:
- Recourse: Where the customer assumes the risk for, and guarantees the invoices. If the client of the customer fails to pay, the customer is responsible for buying back the invoices.
- Non-recourse: Where the factor assumes the risk and guarantees the invoice. This type of factoring is less common and is generally associated with a higher fee structure.
2. The terms and rates of their services
It’s ideal to find a partner that can create agreements similar to those structured at a bank, including features such as 30-day cancellation clauses, giving you a way out if needed.
In terms of fees, even if the upfront rate is low there can be a long list of add-ons that ultimately drive the price much higher; with charges for things like phone calls or ‘same day funding.’
No matter what the terms are, transparency should be the tone for the entire transaction. If a potential partner is not 100% clear with you about what will happen and how, it’s time to move on to the next candidate.
3. Industry experience and depth of knowledge
Given the intricacies and risks associated with different industries, it’s important to find a factoring partner that is experienced in your particular industry. In addition to this industry-specific knowledge, having a team that has been in business for many years can also help to avoid any pitfalls that a less practiced company may inadvertently encounter.
4. Service: Speed, availability, flexibility
Factoring, above all else, is a customer-centric activity. So find a partner who is responsive to your needs and is able to deliver high quality results quickly — within 24 hours of approval ideally.
Given the scalability of factoring, as long as you choose a partner with access to enough capital, you’ll have a funding solution that can grow as big as your goals.
Factoring is one of the best alternatives to traditional banking mechanisms, bringing cash flow to growing businesses when it is needed most. Choosing the right partner for invoice factoring means looking beyond the basic rates – which can be misleading. Ultimately, choosing the right invoice factoring partner for your business will have important consequences, so it’s worth taking the time to ask the right questions.