The devil is in the details, as they say. Nowhere is that more evident or important than when money is on the line. Financial contracts of all kinds have a multitude of disclosures and details that specify the terms of the agreement. The trouble is, there are so many pages to get through and it’s often printed in a very small size, that people will casually glance through these sections or ignore them altogether, focusing instead of the large numbers and details in front of them.
This is a huge mistake!
It’s in that fine print that the true details of the arrangement are disclosed. The large print is designed to catch your eye. The fine print is where the reality of the transaction is spelled out. It’s a common tactic in car sales. Ads may trumpet “0% Financing On All New Vehicles,” but the fine print says “For qualified buyers with $5,000 down” or some such restriction. Chances are very few will qualify for that 0% rate, but the ad will draw buyers in.
It’s a similar situation when choosing a factor. You will hear sales pitches such as “rates as low as” or “starting at.” Neither of these tells you what YOUR rate or fee will be – and that’s what matters. The way the rates are determined will be explained in the fine print. What you will typically find is that the marketed rates are not indicative of the whole fee, but are just a portion of the fee. This lower fee is usually based on a shorter time frame than what you might need. For example, the quoted fee may not be based on a traditional 30 day payment cycle but, rather, on a 5 day cycle. The rate will appear to be much lower than the competing rates, which are more than likely quoted based on 30-day cycles. This is a great example of why you need to read the fine print on every quote, so you can make sure you’re comparing apples to apples. Factoring companies have different ways of doing business and the specifics may not be obvious to you at a casual glance.
Factoring Advice To Protect Your Business
Here are some of the most common areas in which consumers are taken by surprise after signing a factoring contract. Read the fine print to avoid making the same mistakes.
1. Double-check your interest rates. Just like the car dealer example, the advertised factoring rate or discount rate may not be the one for which you qualify. Always, always, always get a clear understanding of how factoring or discount rates are calculated and what your rate is.
2. Watch for hidden fees. You’ll likely pay the factoring company a fee as payment for their service. But watch out for additional hidden fees like those for money transfers, collateral, search updates, or other business costs. Make sure the company you choose is upfront about these fees so that you’re not surprised.
3. Verify the terms of the contract. Long-term factoring contracts can be a great way to get a break on fees or interest rates since some companies give discounts for volume or repeat business. But find out what the terms of the contract are before you sign up. Chances are it will be for one-year, but it may automatically renew every year unless you provide 60-90 days notice.
4. Is it recourse or non-recourse factoring? Recourse factoring is the less expensive and more flexible option, but if the client does not pay on the invoice, you’ll have to. Non-recourse factoring is more expensive but there is less risk to you. The factor handles the entire process from buying the invoices to checking client’s credit scores to billing and collections. If the client doesn’t pay, you are not responsible for making up the payment.
5. Must you factor all of your invoices or can you factor only a portion of them? Some factors will want to factor all of your invoices, others will want only a portion. You’ll want to know upfront how many invoices they are expecting from you each month.
6. When do they file a UCC Lien? Uniform Commercial Code (UCC) liens must be filed once you sign a contract with a factor. They (protect the collateral position of the Factor and are required in order to issue the Notice of Assignment) serve as notice to your clients that the factor will be collecting on the invoices. But watch out for factors who want to file these liens BEFORE you sign the contract. Once a UCC is filed you are locked into an agreement with that factor. In this way, UCC filings can be used to trap companies into working with a particular factor.
How NFG Is Different
Factoring companies structure their services in different ways. Never assume that because one factor told you a certain thing, it will translate to other factors. Since they all do business differently, it can be hard to compare apples to apples.
National Factoring Group is here to help you make objective comparisons between factors. Using our service you can search for factors that meet your criteria such as the industry they specialize in factoring, the amount of your monthly invoices, or the length of the contract. We’ll pull results based on those criteria and present you with a list that not only discloses the fine print, but also compares and contrasts the factors so you can make an informed decision.
All of the factors that we work with have been thoroughly vetted and researched by our team to ensure they have ethical business practices. We do not work with factors that use underhanded or questionable tactics or bait-and-switch techniques to lure in clients.
Every factor you talk to is going to try and convince you that they are the best choice. Don’t take their word for it. Do your own research and select a factor based on the services that are important to you and your business. Take your time reading through the contract and make sure you understand the terms completely before signing anything. Your business’ finances are on the line. Don’t leave anything to chance.
To learn more about factoring, visit National Factoring Group at www.nationalfactoringgroup.com.