Obtaining working capital is essential for small businesses to operate and overcome cash flow gaps. But equally important is making an informed decision about which financing provider to partner with.
To help you understand what type of factoring company is right for you, here are 8 golden questions to ask yourself when looking for the best invoice factoring company for your business.
What types of business factoring services do you offer?
When choosing an invoice factoring company, consider the type of service your business needs. Do you want to factor all of your invoices or do you want to be able to choose which invoices to send for financing? Are you willing to take on risk in case a customer fails to pay an invoice?
These are the key discount terms and options you should know:
Timely Factoring vs Full Factoring
- One-time factoring: spot factoring allows a single invoice to be discounted on a one-time basis without long-term contracts, which allows greater flexibility. However, rates tend to be higher.
- Full factoring: With full balance sheet factoring, also known as full factoring, a company is required to send all customer invoices. The rates are generally lower than spot factoring, but most factors will charge a substantial termination fee.e if you decide to cancel your contract with them.
Recourse vs. non-recourse
- With recourse: With recourse factoring, business owners assume the risk if their customer does not pay the invoice on time. If the customer does not return the invoice payment they sent to the factoring company, they must cover the costs and repurchase the invoice from the factor. Recourse factoring is less risky for the factor and is generally a more affordable option than non-recourse factoring.
- No recourseWith non-recourse factoring, business owners will not be liable if their customers do not pay the outstanding invoice. However, rates tend to be higher because the factoring company assumes more risk. In addition, most non-recourse factors will avoid accepting invoices from their customers who have low credit scores and poor payment history.
Factoring vs. invoice financing
- Invoice factoring: Invoice factoring is the sale of a company's accounts receivable at a discount to a factoring company in exchange for a cash advance. The amount of the advance payment is usually 80 to 95 percent of the invoice sold (depending on the relationship with the payer it can be 100%).. Unlike traditional bank financing, factoring provides more flexibility because the cash you receive depends on the invoices you send and technically, it is a source of debt-free financing.
- Invoice financing: with invoice financing, business owners do not sell their accounts receivable to the factoring company. Instead, business owners use their accounts receivable as collateral to qualify for a loan. The amount of the loan depends on the strength of their invoices. There is a higher risk for a small business with invoice financing because the invoices are still owned by the business owner.
What conditions and rates do you offer?
The fee structures for factoring company ranges are variable or flat. As a general rule, the more bills you discount, the lower your rate will be.
With variable rate structures, also known as tiered rate structures, factors will deduct a small percentage from the bill while the bill is outstanding. This means that the longer your bill goes unpaid, the more fees you will accrue over time. Although variable fee structures are more complicated to calculate, they can be more profitable depending on your business profile, because the fee is based on account risk.
With a flat rate structure, the rate remains the same no matter how far behind the bill is. However, fixed rates are generally higher than variable rate structures. Fixed rates are calculated by multiplying the face value of an invoice by the fixed rate.
So if you have a lot of customers who consistently pay well in advance of their net terms, it is more cost effective to use a flat rate structure than a variable rate structure. Otherwise, if you plan to bill occasionally, flat rate structures make more sense. It is also important to note that flat rate structures are commonly used for companies in the transportation industry to facilitate accounting.
Factorization terms and rates are determined by a number of factors, including but not limited to:
- Business industry
- Invoice volume
- Net invoice terms
- Type of service
- Customer quality
- What industries do the factors work with?
B2B companies with large customers and longer net terms are excellent candidates for accounts receivable factoring.. Companies in these industries are large users of factoring:
- Transportation
- Staffing services
- Manufacturing
- Construction
- Distribution
- Freelancers (i.e. marketing, public relations and creative)
- IT services and software development
- Consulting
Are there any hidden costs or fees?
Some invoice finance companies have hidden fees or penalties. Understand what triggers penalties so you can avoid them.
- Termination fees: if you sign a long-term contract with a factor and decide to cancel it, you may have to pay a substantial cancellation fee. Termination fees can range from 3% to 10% on your factoring line of credit.
- Minimum monthly rates: Some factors require companies to commit to factoring a certain number of invoices per month. If a company does not factor enough invoices, the factoring company will charge an additional fee.
- Maintenance fees: this fee is charged to keep your account open/updated with the factoring company. Maintenance fees are generally charged on a monthly basis.
- Due diligence fees: are charged whenever the factor needs to check your client's background. The factor will make sure your client has no existing liens, is in good credit standing, unpaid taxes and more.
What is in the factoring agreement for companies?
Invoice factoring agreement is a financial contract that explains the costs and terms of your factoring plan. It includes general terms and provisions, so it is important that you study and understand an agreement before signing it.
Verify the rates and terminology used, such as the minimum annual commission or customer limit. Be aware that some factoring agreements impose high cancellation fees. Long-term contracts may also require you to advance a certain amount of invoices.
What is the factor advance rate?
An "advance" rate is the percentage of the face value of the invoice that you will receive in advance. A fair advance rate is 70 to 95% of the face value of the invoice (Detra-an Intelcost brand- discounts in most cases 100%). For example, if your customer owes you $ 1,000, you should expect to receive a cash advance of $ 700 to $900 on your account.
How quickly can you obtain funds?
Some factoring companies (especially traditional factors) can take months to set up your trading account, whereas modern solutions, such as Detra de Suplos, can set up your account in less than 2 days and, once the account is set up, you can get funds within hours. Online finance companies have made due diligence more efficient through automation. What this means is that modern factors can now verify your customers, their invoices and any existing encumbrances on your business more quickly and efficiently. Most modern factors can have funds deposited into your bank account within hours of sending an invoice, once your account is fully set up.
Do you offer a good service?
Depending on the complexity of your business, you may want to speak with a financial advisor who can facilitate consultations before, during and after your application. Whether you choose to work with an online or traditional factor, make sure a real person on the other side is assigned to it to help you overcome unexpected challenges and ensure you get the right amount of funding for your business.
Are you a good candidate for invoice factoring?
Think about the importance of each of these questions to your business and look for an invoice factoring company that provides you and your business with the optimal combination of features, flexibility and terms that you deserve. With a little research, you will find a partner and an agreement that offers you the funds, the flexibility, transparency and conditions that suit your needs. As a guiding principle, look for a partner you want to work with for the long term and don't settle for less.
Detra offers a simplified approach to invoice prepayment.
Detra specializes in online invoice financing for business owners who want flexibility, speed and transparent rates and terms. We offer cash discounting, with our easy-to-navigate Dashboard, you can receive funds in as little as one business day. Learn more about invoice financing here.
Source: Vine
