After you locate the factors that service your industry, you need to determine the pricing structure for each of the companies. To do this, figure out your possible payment scenarios, and the total fees charged by each factor for those scenarios. For example, if you factor $100,000 in invoices, what percentage or dollar amount of the $100,000 comes out in fees? Usually these fees range from 1 to 6 percent based on the creditworthiness of your customers and when the invoice is paid. You’ll also want to find out what percentage the factoring company will advance on your invoices. Typically, factors provide 75 to 90 percent of your invoice value upfront. Other considerations include deposits or application fees.
Some factoring companies require a minimum dollar amount for each invoice or a total dollar amount for all your invoices before they will factor your accounts receivables. Others may mandate a minimum contract length and charge penalty fees if the agreement is breached. Some factoring companies will also require that you factor a specific baseline dollar amount of invoices on a monthly basis. Minimums aren't harmful in themselves if you are going to be factoring above the amount required anyway, but make sure you understand what you are agreeing to here and make sure your not needlessly going to have to incur more cost than necessary.
The next area you want to examine is how unpaid invoices are dealt with? Does the factor take on all the risk and provide credit protection if the invoice is not paid, or the customer goes out of business? This is known as non-recourse factoring. Does the factor charge back the invoices that go unpaid, which is called recourse factoring? There are also some factors that will allow you to substitute new invoices for ones that have not been paid. Some factors are more flexible on 90 day recourse then others, make sure to make an inquiry in this regard.
One of the most important issues to consider is how the factor interacts with your customers. Some factors may contact the customer to verify the invoice or place a notification on the invoice that communicate that the payment is to be remitted to the factoring company. Many factors will walk you through the process of how they deal with your customers, allowing you to review letters and phone scripts they will use with your customers. Contact with the customer is this industry is pretty typical and this practice is largely accepted by business, but make sure you understand if the factoring company you are speaking with does this and if so how they do so.
A Quick Summary
While price is a primary consideration, it is important that you compare all aspects of the factoring arrangement to find the factor that best satisfies your needs. Often, these relationships continue for an ongoing amount of time and you need to use a factor that you are comfortable with. If you need help locating the factoring company that is right for you, give us a call or shoot us an email.