Factoring has provided important funding to businesses, helping them with capital to grow. They provide needed funds when businesses start struggling with cash availability. It’s the financing you turn to when you have the potential or assets, but not the cash.
Unfortunately, there are a few factoring companies that might try and take advantage of the their client’s lack of knowledge with the process. Thorough research isn’t just suggested—it’s required—before signing a factoring agreement.
Generally, understanding what you are signing, before signing is standard protocol. But, this is especially true for factoring agreements. Some companies fill their agreements with extra requirements and hidden charges. Find out before you sign and save yourself the trouble.
Understanding the basics and the questions to ask will go a long way when looking into factoring companies and agreements.
The 7 Important Questions Before Signing a Factoring Agreement
1. What will my advance rate be?
Your advance rate is the percentage of your invoices that received as an advance. On average, factoring companies provide up to 80% of the total value. Knowing the advance rate enables estimating your cash flow—before you get it. Accepting a factoring agreement without knowing the advance rate denies you the opportunity to plan ahead.
2. What are the minimum sales volumes required by the factor?
Minimum sales volume is a fundamental qualification when factoring companies consider whether you qualify. Typically, they have predetermined minimum sales volume you must meet before qualifying.
But, don’t worry too much if you don’t meet it. You may still qualify for factoring, but at a higher rate. The higher rates compensate for the low sales volume, ensuring the agreement makes financial sense to the factor.
3. Will I incur any extra charges and fees?
Most factoring companies are upfront about their charges. However, there are those that include hidden charges and bury it in the fine print. Looking for red flags? Companies who charge significantly lower than other companies usually recoup these costs through the hidden charges.
Hidden charges might include credit check fees, invoice modification fees, misdirected payment fees, and termination fees charged for ending the contract before the agreed contract time is up.
Unfortunately, companies don’t make these fees easy to understand—or even catch. Hiding behind complicated language, companies deliberately confuse clients. Luckily the solution is simple: if you don’t understand, ask! Seek legal assistance before signing an agreement that has confusing language or hidden fees.
4. Who is responsible if the client on the invoice fails to pay?
There are two types of factors: non-recourse and recourse.
Non-recourse factoring companies conduct a credit check for the clients that are factored on the invoice. This is done to confirm the creditworthiness of these clients, with the financial soundness of the client and his payment habits coming under scrutiny. This is because a non-recourse factor provides credit protection on their client’s receivables.
Clients whose creditworthiness is not satisfactory are considered to be with recourse and are not insured. If the receivables fail, the factor has recourse to their client. Before committing to a factoring agreement, find out whether the factoring company is a recourse or non-recourse company.
If it’s a non-recourse company, find out whether you are required to pay a fee to the company to conduct credit checks on the clients on your invoice.
5. Does the company offer a variety of products?
One size doesn’t fit all in factoring. There are different varieties available, fitting sectors specific needs. When you start search, find out which ones your factoring company offers.
Learning about your factors capabilities indicates their ability handling anticipated change of circumstances later on. One of these is selective factoring in cases when you decide that you’d only want to factor a few of the receivables. The more options a factoring company offers, the better suited it is to meet all your financial needs.
6. Does the company have any specific experience in my industry?
While not an immediate disqualifier, finding a factoring company that specializes within your business sector goes a long way. Previous experience in your specific industry gives the factoring company a unique opportunity to serve you better and to bring expertise in that field. Different industries have varying structures, requirements and regulations, someone with specializations in your industry will better understand these.
Blue Ridge Factors has expertise in invoice factoring, purchase-order funding and asset-based loans across the board. However, they also specialize in:
7. What will be the maximum credit line available to me?
The financial muscle of a factoring company should be considered before signing a factoring agreement. Can they put their money where their mouth is?
Some companies are either branches of big banks or have a close relationship with banking institutions. This gives them the unique ability to provide as much financing as you require. But, they are large and institutionalized—they may be more about the bottom line than your success.
While smaller, independent factoring companies can offer a more tailored experienced. Or maybe you will find the best of both worlds! The amount of required financing will help determine this decision.
In the end, due diligence before signing is always good—especially with factoring agreements. Educate yourself on the different aspects of factoring and do a background check on the factoring company. Be wise; don’t rush into signing a factoring agreement.
Still not sure where to start? Contact us today with your questions—we have the answers.