Small Business, Accounts Receivable Factoring

Working With an Accounts Receivable Factoring Company: What to Expect

Posted by Factor Funding Co. on February 22, 2022

working with accounts receivable factoring company

So you’ve heard about factoring and think it might be a good solution for your business. How do you find the right factoring company to work with? What makes a factoring company reliable? What should you expect?

Just as you would for anyone you do business with, you want to research the factor under consideration, ask a lot of questions, and carefully read any contract you are asked to sign.

From the beginning of your relationship, you should expect transparency from your factor about everything to do with their invoice purchasing practices, from their customer service to the fees and interest they charge.

Looking for a Factoring Company

The best factoring company for you is one that will meet your unique business needs. Some small business lenders offer factoring services, while others are established specifically as factoring companies. 

If you expect to work online, the first thing you need to know is whether the factor’s systems are compatible with your accounting or business software. Most factors can work with popular accounting software and services such as FreshBooks, QuickBooks, Xero, or other business software.

Once you narrow your list to factors with compatible systems, find companies that offer multiple financing options. Ask about their interest rates and fees, how they calculate their prime interest rate, and whether it is tied to the factoring. You’ll want to find a company that offers flexible services that can be molded to fit your specific needs.

Be aware of the length of the factoring contract. More extended and more complex contracts may not yield the advantages you seek. A shorter-term contract may be easier to understand and administer.

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How Much Will They Pay?

Payment advances are dependent on a wide variety of variables, including your industry, the quality of your customer base, the volume of open invoices, and the terms of your contract. You can expect to receive anywhere from 60% to 95%. Factor Funding advances typically range from 70% to 95%, with some exceptions. When the customer pays the invoice, you receive the balance minus any fees and interest.

Each factoring company works with particular ranges of funds. Find one prepared to lend or pay you the amount you need. For example, one factoring company only provides lines of credit between $20,000 to $5 million, while another offers funding from $100 to $100,000. 

Now that you've narrowed your list, consider the age of the factoring company and its reputation. Consult online reviews to determine how the factor’s other clients feel about their experiences. 

Do They Offer Customer Support?

One important detail to learn is the level of customer support the factor offers for those whose invoices have been factored. Most customers won't realize the difference between the factor and your business. If they receive poor customer support from the factoring company, it will reflect poorly on you.

Also, your customers will learn that you are using a factoring company if they must send their payments directly to the factor. You are expected to update your customers with the factor's address once an invoice is factored. Depending on the customer, they may not wish to deal with an unknown company. This will be an issue primarily with factors that purchase your invoices.  If you arrange for a loan using the invoices as collateral, you will still be responsible for collections and nothing has to change for your customers.

Underwriting Considerations

Once you find your factoring company, it’s your turn for a bit of scrutiny. Factoring companies look at several aspects of your business before taking you onto their platform. Deal terms and the payout percentage differ in relation to your accounts receivable balance.

Some factors charge a flat percent per time period it takes a customer to pay the invoice. For example, you may sign a contract charging 2% per month. If your customer pays the invoice within one month, the factor only charges 2%, but if it takes the customer three months to pay off the invoice, you will be charged 6%. 

Look closely at how the rates are calculated, including the time period and percentage charged. Factoring fees depend on the volume, invoice size, and your customers.

Other factors charge a variable rate that depends on the industry, your customer’s transaction history, and the stability of your business. Before you set up a contract, make sure you completely understand the process and all associated fees. Reputable factoring companies will be transparent about their pricing and fees.

Ready to solve your cash flow problems? Get a free, no obligation factoring  quote today >>

Are Your Invoices Valuable?

Factoring companies have definite preferences about invoice value. The age of your accounts receivable significantly influences your financing terms. Factors prefer shorter payment terms, so if you expect your customers to pay within 90 days, your invoices are more valuable than if you require payment within six months. 

Longer payment terms and delinquent accounts may not be considered for factoring. If they are accepted, you might receive lower financing amounts and a lower principle to value ratio. The factor is trying to reduce its risk of absorbing unpaid invoices.

Other Fees

A factor may charge other fees beyond the discount rate. Besides learning what percentage the factor is willing to advance upfront, you need to know if additional fees will be taken off the back end once the customer pays the invoice in full.

Some potential fees include:

  • One-time origination or account setup fees
  • Lockbox or service fees, which may be between $50 and $500 per month
  • An incremental fee for flat rate factoring, usually around 1%
  • Unused line fee, which is applied to the average unused portion of the overall factor line per month
  • Monthly minimum volume fee
  • Annual renewal fee
  • Overdue or collection fee if the factor must take action to collect payment
  • Credit check fees
  • Non-recourse factoring fees - if you have non-recourse factoring, you aren’t held liable if a customer fails to pay an invoice.
  • ACH transaction and wire transfer fees

Check the fees and interest rates for every factoring deal you make, even if you have used the factor before. So much depends on the creditworthiness of your customers that you might see higher rates if the invoices belong to riskier customers than the last time you dealt with the factor.

Also, adhere to other terms of your factoring agreement. If you factor fewer than expected invoices in a given period or you make late payments on an accounts receivable loan, you may be charged a penalty.

At Factor Funding, we understand how confusing factoring contracts can be. We also know that your business needs can change. That’s why we do not lock you in long-term contracts that you are not comfortable with and are upfront about all costs (with no hidden fees). Get a quick, no obligation quote today to see how we can help you grow your business.

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