There are so many great receivables finance companies, and so many different ways in which they operate. This means that one company may be right for your business but not necessarily right for another business, even if both businesses are in the same industry. This is why we created this simple guide to help your explore things that are important to your business but not often thought about until it is too late. We recommend using a pen and paper and analyze the topics below.
Determine your credit needs.
- What are your current credit needs?
- What will your credit needs be in six months and then a year from now?
- What are your average payment days?
To help answer what your credit needs are use this formula
365/average customer payment days = total
Annual sales (or projected sales)/total+20%
How are you going to utilize your line
- Selective Ledger: One of the most common forms of factoring, giving your business the freedom to control
the factoring fees by choosing which invoices to sell and when to sell them. This is the more popular of
the two options. - Full Ledger: This is for businesses looking to factor all of their invoices. There are certain companies that require you to factor all of your invoices, in exchange they typically will offer a better rate because they are better protected from a collateral position as well as the ability to forecast more accurately, bringing them more stability. If this is an option for your business and you are looking to factor the majority of your invoices this is an excellent choice. When doing a search if you do not see a full ledger option you can approach a selective ledger company about getting a discount by committing to a monthly minimum.
How do you invoice your clients?
- Originals: If your client requires original signatures on their invoices then going with a factor that requires original invoices can be a great choice and can save you money on the postage fees. If you are looking for an invoice company that works with originals we recommend selecting “closest to me” in order to save money on mailing or having to overnight your invoices to your factoring company.
- Copies: if your clients accept electronic copies of their invoices then you should select a factoring company that accepts electronic copies. This can reduce the turnaround on your factoring time and accelerate your capital.
Are you looking for a Recourse or Non-Recourse Factor?
- Recourse: if you have a strong or well diversified client base, this is the most popular option.
Businesses like this option because it is cheaper and more flexible than Non-Recourse. Since the invoice
factor is not taking on the credit risk they will be less expensive and more willing to be flexible. - Non-Recourse: If you are looking for a turnkey option this is the one for you. The funder will buy your invoices and they will do everything from credit checks and billing to collections. If your customer becomes unable to pay for financial reasons, you are not on the hook. This is a great option for businesses that are constantly working with new customers and don’t want to have to maintain a large back office.
What collateral position works best for your company?
Accounts Receivables Finance Companies collateralize themselves through a UCC-1 filing but
they have two ways of approaching their UCC -1
- All Assets: This is also known as a blanket lien. It covers all the assets of the business. If your
company already has loans on things like equipment, this will put them in a second position on those encumbered assets. If you ever need to borrow against or would like to sell the encumbered assets you will need permission through a subordination agreement between the funder and the new lender. The benefit is that the lender feels more protected which reduces their risk therefore reducing your fee. This is a great added savings for business with a low amount of assets outside of their invoices. - Receivables Only: Some receivables finance companies will only take the collateral that they are advancing against. While this does not put them in as secure position as a lender that has a blanket lien. They are confident in your invoices and their system. This is more appealing to businesses that have additional assets. Good examples are trucking companies, manufacturing, or any other type of business that has additional assets that they wish to keep unencumbered for any variety of reasons. While the cost may be a bit more the benefits can outweigh the expenses.
New to factoring? Learn about how this can improve your cash flow and business by visiting our Definitions, and Frequently Asked Questions sections of this website.
Start searching for accounts receivables financing right now. Just fill out our find-a-factor form to find the perfect factor for your business!
We’re here to help you get the financing assistance you need at terms that work for you. If you have any questions about the process or the results you’ve received, don’t hesitate to contact us via our contact form or by phone at 903-776-4NFG (4634).