Why Some Companies Fear Factoring
Despite all the potential benefits of factoring, some companies shy away from it due to misunderstandings or possibly a previous bad experience. Not all factoring companies are the same, so let’s review some issues that can cause problems.
1. Credit Limits on Your Customers
Some factors may try to put credit limits on your customers to keep them from overextending themselves and defaulting in the future. This can harm your relationship with your customer and affect future orders.
2. Penalties for Leaving Early
Factors may impose a penalty for early termination of services or make it hard for you to end the relationship if you have a problem. Avoid getting locked into a long-term relationship until you know how factoring is going to work for you. There are plenty of companies that don’t lock you into long-term agreements.
3. Disputed Charges
With recourse factoring, you need to have a fast and effective method for dealing with disputed charges to avoid having legitimate payments charged back to you. Make sure you understand how the disputed charges are handled and stay on top of any disputes to curtail unnecessary charge backs by your factor.
4. Relying on the Factor to Collect
Keep in mind that you are entrusting the factoring company with collecting payment on your invoices. Obviously this is a vital task, so make sure your factor has a professional and effective process. Most reputable factors are happy to go over their collection process with their clients.
5. Required MinimumsSome factoring companies require that you factor $75,000 to $100,000 a month. Others do not require minimum amounts, but allow you to factor on an invoice-by-invoice basis. If possible, it is best to have flexibility in the requirements.
6. Checks Payable to the Factoring Company
Some factors require that checks be payable to them. This can have a negative impact on your customers. They may assume your company is struggling or be uncomfortable with the change of procedures. Some factoring companies are willing to negotiate on this point. Either way, make sure you understand how the factoring company explains this notice of assignment to customers who don’t understand factoring.
7. Fees Can Increase if Customers Pay Late
Some companies wrongly assume that factors are akin to collection agencies and factor only their slow paying customers. The longer it takes for the customers to pay the higher the fees you end up paying. You’ll only pay around 1% to 3% if the invoice is paid with in 30 days, but after that you can incur daily fees between 1/8th% to 1/15th% for each day beyond 30. Make sure you understand how the fees are assessed for different time periods.
At Meritus, we go out of our way to make sure our clients understand all the details of the factoring process. We want to help our clients reap the positives of factoring while avoiding some of the common pitfalls. That’s why we’re upfront about some of the problems you can run into. If you have any other concerns or questions about factoring, contact us by email or phone.