Factoring

By Sylvia Rosen

When your business is facing a short-term financial crunch, factoring can be a useful way to turn outstanding invoices into ready cash. However, choosing the wrong factoring company can lead to headaches, dissatisfied customers, and worse.

Before you even start, be ready with the following:

1. Make sure you're a good candidate for factoring. You'll have to have at least $5,000 in monthly invoices for factoring to make financial sense, and some companies may prefer a minimum of around $10,000.
2. Factoring companies will also look at the customers who owe you money to determine if there's a risk that they won't pay, so having long-term customers with proven track records can help your cause.

The following are more tips on how to choose the best factoring company for your business.

Finding the best factoring companies

First, use BuyerZone's free factoring quote request service or perform your own research online to find 4 to 6 factoring companies. Meet with each of them to find out which offers the best rates, the highest level of professionalism, and most experience.

When looking at these companies you should know that factoring typically costs a few cents on the dollar depending on the industry. If one of the companies you're looking gives you a quote and the rate is above 1%-3% then you should look to remove that company from your list of considerations.

A typical breakdown of factoring costs will look like this:

• Factoring fee: 1%-3%
• Reserve fee (varies by company): Typically around 20%, held by the factor until the invoice is paid

This basic example will explain the process in simple steps, let's say you have an invoice for $100

1. The factor receives the invoice and advances you $80
2. The customer then sends payment to the factor for $100
3. You are then rebated $17 dollars, the remaining $3 is kept by the factor as the 1%-3% factoring fee.

While these fees vary it's important that you're looking at a similar process at least. If you can find a business that works in various industries is a good step to choosing the best factoring company. See if they work in the any of the following industries:

• Transportation (freight)
• Government
• Staffing
• Manufacturing
• Service
• Distribution
• Medical

Since the factoring companies work directly with your customers, you should observe how the agencies do business in person. Review their collection letters and sit in on phone calls to investigate the process. Also, find out how the factor handles past-due accounts and when they turn to a collection agency.

Is the factoring company a good match for your business?

Factoring companies vary in size and expertise: the best factoring company for your business will have demonstrated success with other companies like yours. Ask potential factors what their clients finance: $10,000 per month? or $100,000?

A company that's used to dealing with clients of your size is more likely to give you the level of service you deserve.

There are specialty factoring companies to consider, too. Medical factoring and construction factoring are two very specialized fields, due to the complexity of the billing process and the legal requirements. If you're in health care or construction, make sure you choose a factoring company with significant experience in your industry.

Do they provide the tools and services to help you succeed?

The best factoring companies offer online invoicing systems that let you submit new bills for factoring and review customer payments and your total costs. Electronic submission can reduce the turnaround time to as little as 24 hours, so if you need cash in a hurry, it's a lifesaver. It also eliminates questions about payment and progress.

Finally, customer service is essential, both for your customers who may contact them and for your own questions. Ask detailed questions about what hours support is available, how many reps will be supporting your account, and how you can resolve any problems.

The best factoring companies will have excellent customer service in place to make sure that you return to them for future factoring needs.