It is important to remember that factoring companies are not all the same. Distinguishing charateristics and levels of customer service will help you decide which company is the best match for your business. Of course, the decision is not always clear cut. The following list of tips will make your decision easeier as you choose the right accounts receivable factoring company to meet your needs.
First, determine whether your business is looking for recourse or non-recourse factoring. This important factor will determine the level of risk your business takes. For example, a factor that conducts strictly recourse transactions will take nearly any accounts receivable off your hands. They will attempt to claim the debt, but if the debt isn’t repaid within a certain time period, you must repay the advance plus the fee. The main advantage to this type of transaction is that the company takes nearly any debt off your hands, but there is a level of financial risk to your business.
On the other hand, a factor that deals in non-recourse transactions is going to examine your customers’ history of debt payment. The company takes the risk of non-payment. If they deem a customer unsuitable, they will refuse the transaction to protect their interests. This is often advantageous because it protects your business from risk, but some of your customers will be unhappy when you no longer offer them credit based on a your factor company’s negative report.
Another thing to examine is the fee that the company charges for each transaction. Naturally, you want to keep as much of your profits as possible. Get companies to compete for your business, and you will make factoring work for you. If you don’t shop around, accounts receivable factoring becomes more expensive than some other business loans. Be sure you seek out the best rate possible at the company of your choosing.
Of course, once you find the right factor company and use them repeatedly, they’ll work with you to make the transactions more profitable. This usually involves a lowered fee. As the fee gets lower, factoring becomes more like a quick business loan. When you need capital for your business, whether it’s for expansion or to take advantage of dealer sales, a lowered fee means more money for you.
Other things to consider are whether the company requires you to sign a term contract. Term contracts may provide a better fee structure but can also cause customer dissatisfaction if the company mistreats them. Also, there is often a hefty termination fee if you end the contract early for any reason.
Some companies bulk your receivables. This means that they keep your entire reserve until the last customer has paid. If all your customers except a few pay quickly, that money will sit with the factor until they receive the last dollar. If you are in a hurry to get capital, this is not the right choice for you. Avoid such companies if your company needs money quickly.
When you choose a factor company, you are participating in an age-old method of business funding. With the right planning, account receivable factoring is a very profitable addition to your business strategy. Review each company well and figure out which one is the best fit for your business.
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