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7 Things To Consider When Choosing A Factoring Company

Not all factoring companies work and function the same way. So, finding the perfect one for your business may require some research along the way.

7 Things To Consider When Choosing A Factoring Company

When you find the right factoring company, it can bring an immensely positive impact to your company. They can help you map out a plan and achieve your financial goals easier.

This is especially important if you’re competing in a growing market.

Factoring Company Defined

Before you go and find one, understand that factoring companies concentrate on buying your invoices to improve your cash flows. It works to reduce the standard waiting period of your pending invoices, which usually takes up to a month or two.

By selling your outstanding invoices to factoring companies, you get to obtain your money faster.

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Factors To Consider When Picking A Factoring Company

concept of factoring

There are several factors you must consider when it comes to selecting the right factoring company for you. Browsing through the standard rate will not be enough.

You have to look at the matter from a grander scheme and consider your long-term plan. Factoring is not a quick fix to getting your cash immediately. Instead, it’s a financial game plan.

For that reason, you’ll have to weigh the total cost of your strategy, including the things listed below:

1. Proficiency In The Business

There are several factoring firms out there. So, the first thing you have to consider when picking the right factoring firm is its knowledge and understanding of the nature of your business.

Established factoring firms generally have a history of achievements and credentials. This proves that the firm knows what it’s doing.

Factoring processes are also more likely to be accomplished steadily if you work with a company that understands your business and operation process.

You’ll only be wasting valuable time and effort trying to explain simple payment and business procedures to a factoring firm that doesn’t understand how you work. For that reason, selecting a funder that’s knowledgeably aware of your business model is crucial.

Although there’s a customary way of handling invoices, ultimately, it boils down to your company’s needs. Different industries may manage invoices in a way that suits their system.

For instance, factoring companies focusing on back-office support will accomplish completely different tasks than freight factoring companies. The latter will undoubtedly be more adept at giving fuel benefits, cards, and other perks.

Here are some examples of what factoring companies may do depending on the industry:

  • Construction: Most factoring companies can give invoice lending to construction businesses, including clean-up companies, roll-off operators, coarse crashing firms, and equipment transportation companies. This is because companies like these don’t deal with installment payments and have no conditioned invoices. So if your business falls under these categories, you can partner with a factoring company.
  • Oil And Gas: Oil and gas is a very unpredictable industry. Businesses under this trade are usually left with changing prices and slow-paying customers. Thus, most companies in this industry will do better with leaving accounts receivables to factoring companies. Lenders who specialize in this industry already have an established network and experience.
  • Transportation: Companies specializing in the transportation industry have particular needs in terms of finances. By factoring in your accounts receivable, you’re putting some of the responsibilities of dealing with operating expenses to your lending firm. You’ll be guaranteed to acquire your money immediately so you can utilize it for your operating expenses. This way, you can head straight to your regular operation while increasing your cash flow at the same time.

2. Costs Of Factoring

coins and records

The rate of factoring is highly dependent on the firm that you choose. Some firms offer additional fees to cover factor’s risk and overhead. So, you have to make sure to ask your firm before you start signing anything. Most of the fees charged are payment for the work factors needed for processing your invoice and collecting accounts receivable from your clients and debtors.

Factoring rates that they’ll charge on you usually vary depending on the sum of account receivables you hold. The fee is also established from volumes of sales may it be monthly, quarterly, or annually.

You’ll also often see lenders who will glorify their no minimum deals but these types of plans usually cost more. So, understanding the terms of the contract is very crucial.

3. Contracts And Additional Points Of Deliberation

As mentioned, you should analyze your contract thoroughly before you start signing it. Some factoring companies mandate that you sustain a relationship with the firm for a particular amount of time.

If you fail to meet the requisite amount of time by ending the contract earlier, you’ll be subject to penalties.

It’s also important to understand that different factoring companies provide different credit line sizes. This means you must consider the number of your invoice together with the sum of your credit line when looking for a factoring company.

Ensuring that you understand all the details of your contract is very important if optimizing your operation is what you’re looking for. This helps you narrow down your options.

4. Quality Of Service

Service quality is another vital aspect you must not overlook. Leaving your accounts receivables to a factoring firm makes your customer relationship vulnerable. This is because factoring is a customer-centric task.

For this reason, it’s with utmost importance that you find a partnering firm that’s easy to reach and delivers results swiftly. Ideally, you should pick a factor that can provide results within 24 hours following confirmation.

Also, the adaptability of most factoring firms will let you know you’re in good hands when you partner with a firm with sufficient funds.

Factoring is the more unusual counterpart of generic banking mechanisms. This means that it can provide your business cash inflow whenever you need it the most.

5. Firm’s Moral Principles

small boxes

The most difficult but most important aspect you’ll have to consider is whether the firm you want to partner with is honest. To make it simple, you’ll probably be working with the factoring firm for an extended period. Add to that the fact that you’ll be shelling out money for the cost.

And even more importantly, you’re putting your customer relationship at the hands of these firms. For all those reasons, you need to find a firm that’s professional, reputable, and fair.

Considering the other four factors that have been mentioned is essential. But if you don’t feel comfortable with a factoring company despite its good track record, you can verify its reputation from previous clients’ feedback. Check reviews from third parties as well. Or visit their social media pages and check their ratings.

By doing your research, you can weigh whether they’re providing quality service to their previous clients. Of course, more positive feedbacks may mean better service.

Take your time to conduct research. With such, you may also want to compare various factoring companies. Interview them after researching about them. Don’t be shy to ask questions if you have some.

That way, you can make sure that the factoring firm you choose meets all your business needs and preferences because they have a reputation to uphold. After all, the future of your company will be dependent on the decision you make right now.

6. Picking Between Recourse And Non-recourse Agreements

Moreover, it’s also best to choose a suitable factoring agreement. Factoring comes in two main categories: recourse and non-recourse. You’ll do well if you understand the difference between the two.

When you talk about recourse agreement, it means that you’ll have to repurchase every uncollected invoice from your partnering firm. It basically means that you’ll be responsible for dealing with all the unpaid receivables. This type of agreement is the most common out of the two.

On the contrary, non-recourse agreements imply that your partnering firm will shoulder all the unpaid receivables; this means that all your invoice risk will be placed in your factoring company.

However, this doesn’t guarantee full risk-free transactions. There are limitations and specific conditions wherein your factoring firm will take all responsibility. Outside that, you’ll still be tasked with collecting payments.

Whatever agreement you decide to have, you must talk to your factoring company to explain the terms and agreement. Ideally, you should find a factoring company that can offer both deals.

But regardless of which agreement you decide to take on, a dynamic factoring company will do its best to collect your invoices.

7. Figure Out If They Offer Other Services

Most importantly, maximizing the cost of factoring companies requires more than collecting as many invoices as possible. It’s also beneficial to see if your factoring company can give you additional help.

This could be in terms of bill management, credit checks, and other tasks.


Factoring firms could be highly beneficial to your business if you decided to partner with the right one. Like with any other business decision you’re going to make, you must consider every possible factor.

That way, you can choose the best one and don’t end up working with a factoring company that may only bring you stress.

Thus, you may want to use the mentioned factors above as your benchmark. With such, you’ll not be hiring the first one that will come your way.

By doing your due diligence, you’ll have the help you need so you can focus more on more critical tasks in your business.


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