What can factoring companies do?

Factoring companies, or simply “factors,” are organizations that help other businesses with immediate cash needs by purchasing outstanding invoices at a discount.

For example, many companies work on a “net 60” payment schedule which means that customers don’t have to pay invoices until 60 days after they are sent. If your company needs that money quickly to invest back in the business, it can put a tremendous strain on your cash flow. Factoring companies can advance you the money by purchasing the invoices and collecting the full amount while keeping a percentage as their fee.

Sizes of factoring companies

As with many business partnerships, it’s important to choose a factoring company that’s compatible with your industry. Many of these enterprises have specific criteria to describe their ideal clients, and they won't work outside of the norm. So if you have a small business with low-volume invoices, for instance, a small business factoring company would be the best fit.

Size of factoring companies is also important when figuring out how much risk the factor is willing to take. Larger factors can afford to purchase invoices that could be difficult to collect. They’ll keep a much larger percentage for their fee – 30% to 40% - but they assume the risk that the companies in the invoices will take a while to pay and understand that they may not get paid at all.

Minimum commitment

When you sign a contract with a factor, it’s typically a one-year commitment or longer. This commitment is to provide security for factoring companies – they must protect their interests and maintain a certain level of business. However, it could be difficult to cancel the agreement if the arrangement doesn’t work out. Make sure the factor is willing to put stipulations in the agreement allowing you to back out if you’re not satisfied with the service.

When searching for a factoring company to work with, it’s usually wise to get referrals from trusted business associates who have used the factor in the past. Quality factoring companies will also provide a list of references, but keep in mind that they are probably hand picked and will have mostly positive feedback.

Also, don’t be afraid to negotiate shorter contract terms. If a factor thinks highly of your business and thinks there’s potential for a long-term agreement, they may be willing to work together for a shorter period of time. This gives them the opportunity to prove they would be a valuable partner in the long run.

Make sure you’re satisfied with the services the factoring company provides before you work with them. Talk to a representative about speed of remittance, customer service response, and the amount of personal attention you receive.

Factoring companies’ rate schedule

The rates factoring companies will charge varies widely and often depends on your volume of business. For example, if your organization generates $1 million in monthly revenue, you may pay a rate as low as 1.5%. A company that only grosses $250,000 per month could pay a substantially higher rate because there’s increased risk involved.

Understand that while your invoices will be paid more quickly when you use factoring companies, your total revenue will significantly decrease because of the fees you pay. Factoring isn’t cheap – but it can be an effective and reliable option when you need immediate cash without the red tape of typical financing sources.

Compare multiple factoring companies today by submitting a free BuyerZone request for factoring quotes.