Choosing a Factoring Company is a big decision for any business and one that should not be made lightly. We want to take you through some of the major things that you should consider and why.
Dallas, Texas (Free Press Release) September 5, 2011
As a business owner, everyday has different decisions. I could go into all of them, but at the end of the day that is not why you have chosen to read this. I am writing this in an effort to provide you with information you may need in order to select the right factoring company for you business.
I have working in the factoring industry, for 14 years and worked with over hundreds of businesses and am one of the founders of www.nationalfactoringgroup.com. For the first time a business looking for factoring can go to one place and compare the differences between factoring companies based on the business’s qualification. From there you can connect directly with factoring companies either on a local or national level.
Over time, I have learned that there are a lot of misconceptions about what factoring is and how it works. Factoring, to be put very simply, is the selling of an invoice at a discounted rate in order to accelerate a business’s cash flow. When looking at a new client, the factoring company will look at many variables such as how labor intensive the account will be, the financial strength of the companies the client does business with, and the client’s average monthly sales.
The factoring company will take this information and develop a plan for you, the customer. Now, I know that makes it sound like they are all the same, but that is not the case. Different factoring companies place weight on different segments of the market and industries. They also have different manners in which they underwrite, collateralize their position, deal with the paperwork requirements that they have and the terms of sales that are issued to your customers. It is very important for you, the business owner and potential client, to know these things upfront and is why we created National Factoring Group.
One of the things a business needs to look at when selecting your next factoring company is the comfort level and the extension of credit from the factoring company. Unlike traditional banking, factoring companies will increase your line so long as you are in good standing and the need is there. That being said, the comfort level as to how high they will go or how well they will understand and work with your customers will vary from factor to factor.
A key variable in determining the credit amount that you will need is to look at your terms of sale. If you are selling widgets at $100,000 a month to 10 customers and all customers are paying within 30 days then the likelihood of a $100,000 credit line will work just fine. Now if you are selling the same dollar amount to the same 10 customers who are paying in 60 days, you would need a $200,000 line. If you are a startup, then you would need to look at the industry standard and combined that with the customers you are doing work for.
On the other hand, if you are an established business, you can simply look at your average monthly sales and do the math. If your invoices are turning in 45 days in the example used, for every $100,000 you would need $150,000 credit line.
Another big consideration in searching for a factoring company is whether the factoring company will require original invoices and back up or will allow copies. If you are in an industry where standard billing is all provided on original invoices and/or sign offs, then working with a factoring company that is going to require originals probably makes since. On the other hand, if you are working in an industry that predominantly works off of electronic billing, then a factoring company that allows copies is probably going to be better for you.
Factoring companies that require original paperwork, generally fall into the non-recourse side of factoring. Non-recourse means, very simply put, that you sell your invoice and are done with it; the factoring company takes the credit risk. However if the invoice is rejected due to unsatisfactory work preformed, the liability falls back on you.
On the flip side, in recourse factoring you are guaranteeing the payment of the receivable. The factoring company advances against the receivable and setting forth the date in which the receivable is to be paid by your client. If that date passes with no payment, you are responsible for repaying the amount advanced to you.
So now that you have determined that you either want a funder that requires original paperwork or will accept copies; how do you decide whether recourse or non-recourse factoring is best for you? My best advise it to look at who you are doing business with and the concentration of sales that they represent.
Non-recourse is, by nature, going to be slightly more expensive since the factoring company is taking the credit risk but you might sleep better at night knowing that you do not have to worry about the invoice anymore and will make sure you have a stronger client base because they will be more conservative on their credit decisions.
A recourse funder is typically going to give you a bit more freedom. Because they are sharing the credit risk with you, they will also be a bit more liberal in providing credit availability on specific customers and will bring in some added savings if you do not have any large concentrations with any one customer. Along with providing original paperwork or copies, it is also important to consider if you would like to factor all invoices or only selected invoices or customers.
All factoring companies will naturally take a collateral position however knowing the differences and how they can potentially make life a bit easier in some situations. Collateral basically breaks down into two different arenas that will steer the UCC filing. Either the factoring company will encumber just the accounts receivables or all assets of the business. Once again, there is no right or wrong here, it is just the matter of what works best for you as a business.
If you are in an industry that is constantly changing out your equipment or inventory, you might want to seek a factoring company that will only encumber your accounts receivables leaving you free to change out other aspects of your business. While there are some cost savings involved with encumbering all assets it might not be worth the time and effort involved when the equipment or inventory is traded out. On the flip side, if your assets are pretty much fixed and will not be traded out, then a factoring company that encumbers all assets might be right for you and offer you some savings.
In most cases selecting one over another will not be detrimental to your business and will not affect most day-to-day transactions, but is definitely something worth taking into consideration.
Asking yourself simple questions about your business and its needs and exploring the answers is a good step in figuring out what is going to be best for your business and give you a realistic perspective of what you will qualify for with a factoring company.
You could spend days or even weeks researching which factoring companies work in your industry, will give you the credit limits you need, require originals or accept copies, offer recourse or non-recourse factoring, or will encumber all your assets or just your accounts receivables; or you could just visit www.nationalfactoringgroup.com, enter basic information about your company, review your matches, and connect directly with the factoring companies all in one place.
National Factoring Group was created to promote factoring and is solely supported by the factoring industry as a free tool for you in order to help you find the best factoring company for your business and create a prosperous relationship between you and your factoring company.