Factor Smarter.

March 25, 2024

Factoring is a very competitive industry, with numerous companies proclaiming they’re the “best.” In reality, though, many factoring companies come and go, depending on their continued access to capital and ability to deliver what they promise. How do you sift through the noise to find the right partner for your business? Here are five things to consider:

1. “Too good to be true” is, in fact, too good to be true.

Too often, businesses are lured by vague language and lofty promises. Generally, factoring is more expensive than traditional bank lending for two reasons: risk and labor. Factoring companies take on clients that sometimes create losses—clients who are new to the business, work in industries with high default rates or have a history of financial or legal hiccups. And, unlike bank lines, factoring requires labor and cost to manager accounts receivable: to run credit, secure assets, review contracts, examine invoicing, and to collect and manage payments. All factoring companies bear these burdens, so if you are offered a price that’s dramatically lower than other quotes you’ve received, you might not be getting the same services. Ask questions, and most importantly, read the contract. Make sure you’re getting what you were promised.

2. Beware of rates that escalate before you can possibly be paid.

Factoring rates often increase as time passes, reflecting the added risk posed by slow-paying debtors. But how quickly and how much those rates increase varies from factor to factor and deal to deal. Predictably, in the sales process, some factors emphasize the rate charged at the time of purchase, making it look like they’ll save you money. But what are you realistically going to pay at the time your customer is actually going to pay the invoice? If your rate starts escalating at day 10, it’s not really your rate. If it starts escalating at day 30, and your customer pays at 35, it’s the higher rate you need to pay attention to.

3. What does “great customer service” mean?

Most factoring companies (most businesses, really) promise great customer service. But what should you expect from that vague promise? At a minimum, communication should be easy—your factor needs to answer the phone, get you to a knowledgeable person and resolve your questions quickly. Respect, honesty and empathy should be non-negotiable—challenges pop up and difficult conversations had, and that’s when you need someone working to help solve your problem, not call you out. And flexibility matters, requiring active listening and creative thinking. You’re paying for a service, not just cash. Is your factoring company delivering it the way they should?

4. Don’t get tied into a relationship that’s longer than you need.

Factoring contracts have terms that vary, from one month to several years. And usually, they renew automatically unless you terminate the agreement in the precise way you’re required to, and some factors charge large fees to terminate early. Of course, different businesses have different needs in factoring. We have clients that have been with us for 25 years, while others only want factoring for a matter of months until they transition to other financing. Find the term fit you need, so you’re not “stuck” in a financing relationship you no longer need.

5. Understand all the fees you’re agreeing to.

Fees are a standard part of a factoring relationship, as factors try to cover their costs and risk. And fees are often named differently from one factor to the next. “Schedule fees, treasury fees, processing fees, and set-up fees” can mean entirely different things from different factors. Fees are rarely “hidden,” though, if you’re working with a reputable company. They’re in the contract somewhere. Know what they are, when they’re charged and how much they’ll add to the total cost of factoring before signing that contract, so you’re never surprised. If you can’t get a clear explanation, you might want to keep looking.