Funding For BusinessAt this point, its all about fulfilling your funding for business needs. You have read all the accounts receivable factoring information presented by Learn-About-Cash-Flow.com, including the “How To Decide If Factoring Is Right For You” section. You have determined that factoring may be the solution for your funding for business problem (…or a solution to a business associate’s problems; now tell them about this information). So, what do you do at this point? What is your next move? How do you get funding for business? What you are really asking is: how do I select the best invoice factor for my business? The short answer is: Every business owner is different; each with a different set of criteria for making his or her selection. Though this answer is accurate, it falls into the category of “Taste great; less filling”. And we get it. At Learn-About-Cash-Flow.com, we have assembled a list of the most common criteria successful business owners have used in making their invoice factor decisions to get their funding for business: - What is your prospective invoice factor’s account comfort zone? While just about every factoring company claims that it will factor large and small invoice accounts, each of them will have their predefined comfort zone. This means that while they may have the financial stability to factor accounts of any size, they may feel very “comfortable” factoring accounts within a specific range amount. The question for you is this: is that amount within your funding for business range? For example, some companies may be comfortable factoring accounts from $10,000 to $50,000 per month; others may be comfortable factoring accounts ranging from $40,000 to $75,000 per month; still others, maybe comfortable in the $75,000 to $150,000 per month range. And of course, there are those gigantic factoring companies comfortable with accounts well over $1,000,000 per month. So, as one can see, getting an accurate “fix” on your prospective factoring company’s invoice factoring comfort zone is critical. - What is your perspective invoice factor’s monthly minimum account level? It is important that one understands that factoring companies charge different fees for factoring accounts of different sizes. Most have a lower amount limit on accounts they will factor. So, it is very important to know what that lower limit is. If you expect that the size of your monthly funding for business account will consistently be an excess of this lower limit, then you will be fine. However, you must recognize that should your account level fall below the factor’s lower limit on any month, you may have to pay an additional fee. Therefore, a factor’s lower account limit is very important. - Is your prospective invoice factor “recourse” or “non-recourse”? What’s the difference, why is it important and what does that mean for your business? Recall the discussion concerning recourse and non recourse factors above? The recourse factor purchases your invoices, pays you an advance (i.e., your funding for business amount), then collects the invoice from your debtor company. Should the factor be unable to collect on the invoice, he can return the invoice to you and have his advance returned. With the non-recourse factor, once he buys the invoice, he absorbs all losses should he be unable to collect on the invoice from the debtor company. Whether your factor is recourse or non-recourse is critical in determining your eventual success or failure. One thing to point out: for obvious reasons, in all but rare instances, non-recourse factors will charge higher fees than recourse factors. You will have a big decision to make based upon the credit worthiness of your debtor companies: should you take the chance on establishing a relationship with a recourse factor and pay the smaller fees, or should you err on the side of caution and pay the higher non-recourse factor fees and cover your business against the possibility of a company not paying on its invoice. - What minimum length of time does your prospective factor require for contract duration? Again, this is another very important question to ask. The last thing you want to do is enter into a contract so long that it outlasts its usefulness or your funding for business needs. If you foresee only needing the services of the factor for one year, does your prospective factor require a minimum of two years? Entering into a contract with this factor may not be the best decision for your company. Choose a factor whose minimum contract duration fits your business’ needs. - What fee does your prospective factor charge to break your contract? In choosing a factor, you must ask the question: how much would it cost me to get out of this contract if I deem that it has outlived its usefulness. Again, the answer to this question is critical. After being turned down for business loans by traditional lending institutions, many businesses use factors as a less painful way of obtaining their funding for business needs. Their intent is to use a factor as a temporary fix for their capital needs. After a period of time, they may have built their credit worthiness to the point that traditional lending institutions will loan them the money they need. At that juncture, they may no longer need the services of their factor. In order to break their contract, they may need to pay a fee. The smart question to ask in advance is: what is that fee? - What is the factor’s fee structure? As you may have guessed, factoring fees can be vary significantly and, given the certain situations, can be very high. Normal fees depend upon (in part): a) your monthly volumes; b) the duration of your contract; c) financial strength of your customers; and d) the payment cycle of your receivables. Know that fees (discounts) are normally inverse to the size of the monthly account; fees are higher for smaller accounts (as high as 7% per month for those under $30,000 monthly) to a low of 2 points for those businesses factoring over $250,000 per month. Also, remember that the normal minimum contract time is one year (…and the fees decrease the longer the contract). - What will be the factor’s level of service? If you are new to factoring, you may want to contract with a factor who offers a great deal of support. Will your prospective factor provide you that kind of service? They might, but you must know that this level of “personal” service will cost you. When factors charge the lowest fees, they also provide you the lowest level of service. If you need more, you must pay more. Again, because you may be new to factoring, you may be better off looking for this higher level of service. - How long has the factor been in business? While it is true that good, conscientious new factors can provide the same level of service as a well-established factor, the length of time a factor has been in business speaks to the sound business the factor offers. It indicates the factor’s business acumen, integrity and reputation. Other points to consider when selecting a factoring company: - Meet with the factoring company, either in person or over the phone to ensure there is a meeting of the mind. Ensure you feel comfortable. - How does the factor treat you? Remember, the factor will be dealing with some of your best, most valuable clients and customers to collect payments on your invoices. If you do not feel comfortable or have not been treated in a professional manner, then neither will your clients. - Review all letters and correspondence that the factor will use to contact your clients. Ask to review some of the notifications that a factoring company sends out to clients or even ask to listen in on a phone call between the factor and a business client if you feel the need to. Remember, your company’s name and reputation are on the line. - How will the factor handle your slow-paying and no-paying clients? At what point will they refer those clients to collection agencies? Remember, the factor is dealing with your hard-earned customers. Even though they may be paying slowly on their accounts, they are still your clients. Ensure that your prospective factor will treat them properly. - Does the factor have numerous references that you can call? If not, this is a sure sign of less than great service. If he does, call them. Find out about the length of time it took for the factor to approve their initial funding. How did he treat them? Was the application and approval process simple, or time-consuming and confusing? Did they have any surprises during the funding process, such as additional fees, delays with payment or communication, etc? How quickly did the factor send out the remaining balance of their advance? Ask, if they were to consider using factoring services in the future, would they use this same factor company again? Would they recommend the factoring company to another company in need of receivables factoring? If the answer is anything but an enthusiastic yes, then do not use that factor. There are just too many good factors in existence to use one which has not provided great service. - Does the factor charge any type of fees, such as start up, application, processing, audit, annual renewal, prepayment penalty, money wire or termination? This will affect the amount of funds taken from your total funding for business amount. - Does the factor offer multiple pricing options? - Does the factor offer free credit insurance? - Once the relationship is established, does the factor deposit funds directly into his customer’s account within 24 business hours of receiving the receivables? - Will the factoring company only factor the receivables you want factored or must you turn over all of your invoices and the leave it to the factoring company to choose? Hint: you will want that decision to be yours. - Will the factoring company require detailed financial information from your clients? Will the prospective factor place you in a position of having to explain to your clients the intrusive nature of your factor’s actions? Ask yourself, “Will the prospective factor jeopardize my future relationship with my clients?” If the answer is yes, do not use this factor.
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