How to Find the Best Factoring Company for Your Business
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Updated May 4th, 2024
Business owners and managers may find it challenging to compare factoring companies with all the fine print details involved in the agreements.
Whether or not you end up requesting a proposal from us, we would like to give you valuable tips for your decision process. This guide has been specially designed to help people like you find the invoice factoring company and agreement that perfectly fits your cash flow needs.
Learn to Compare Invoice Factoring Companies
Here are the steps you should follow when evaluating funding options:
- Learn What a Factoring Company Is And The Service It Provides
- How do factoring companies work?
- Types of businesses that they serve.
- Lists of The Best Factoring Companies
- Learn why you cannot trust them.
- How to Choose the Best Invoice Factoring Company for Your Business
- What affects the deal you can get?
- What do you get for your money?
- Evaluate an Invoice Factoring Provider’s Reputation
- What should you look for in a factoring company?
- Evaluate the Service Quality
- Pre-sale and approval stages: how to avoid wasting time.
- Who takes care of your everyday account needs?
What is a Factoring Company?
A factoring company is a business that purchases outstanding accounts receivable from commercial companies at a discount, providing cash flow advances until the invoices are due or collected.
These businesses:
- Purchase unpaid invoices (not delinquent) for delivered products or services.
- Provide about 75 to 97% advances on the invoice value at the time of purchase and then the remaining amount minus fees when they collect the payment.
- Serve only businesses that sell to other companies.
- They are not lenders and do not provide bank loans.
- Contrary to receivable financing (or invoice financing), their financing solution does not require installment payments or create debt.
- Care about the credit ratings of your customers, NOT about your personal or company’s credit history.
How do business invoice factoring companies work?
Factoring companies buy outstanding receivables issued to commercial companies. The factoring process is straightforward:
- Your business sells to other companies, provides the service, or delivers a product and then issues an invoice, giving the customer 30 to 90 days to pay it.
- Then, you submit invoices for factoring and get a cash advance, usually between 75 and 90% of the unpaid invoice’s face value (in transportation, up to 97%).
- The factor waits until the invoice is paid, discounts the advance and fees, and wires the balance to your bank account.
- The process repeats for as long as your company needs business capital.
For complete guides about the process, factor fees, factoring rates, and advances, please go to the articles below:
What Industries Do Factoring Companies Serve?
Factors work with most business-to-business (B2B) industries. They don’t serve companies that only sell to consumers. The range of sectors served is extensive; the most common are the following:
- Trucking industry & freight industry: transportation, trucking companies, and freight brokers
- Temporary staffing
- Manufacturing, logistics, wholesale, and distributors
- Cleaning, pest control, and janitorial
- Construction and infrastructure contractors
- Security services
- Farmers
- Cell tower contractors
- Oilfield services
- Aerospace and aviation
- Food producers
- Marketing and advertising companies
- And many other commercial services
Some of them specialize in only a few niches. It’s common to find companies that only provide freight factoring services, fuel card discounts, or staffing factoring.
Those who serve consulting services or healthcare providers are rare.
The 7 Best Factoring Companies ( this year)
If you run a web search, you’ll find several websites offering lists of the best invoice factoring companies, including titles similar to this section’s teaser.
Typically, these lists rank them based on categories like the following:
- Best for trucking and freight companies
- Best for small businesses
- Best for speedy funding
- Best non-recourse
- Best for low rates
- Best for receivable management
- Best for flexibility
- Best for short-term contracts
- Best for approval rates
- Best for financial options
- Etc.
People mistakenly trust those lists and endorsements without further analysis, which is a big mistake.
Why? It would help if you looked at the small print disclaimer on these sites; the website owner gets compensated for including those companies as the best.
The truth is that most of these blogs that include best lists, online reviews, and recommendations are not reliable. The reason is simple: no proven research supports the inclusion. Instead, these companies base their criteria on financial benefits.
So, if you cannot trust these lists, how do you know which is the best for you?
Here is a primer on what you should look for in a provider.
How to Choose the Right Factoring Company for Your Business
There are three essential aspects that you need to consider:
- Factoring costs, discount rates, and other service details
- The company’s reputation and history
- The quality of the services provided
Let’s go deep into each one of these valuable points.
Factoring Agreements Specifications
The underwriter studies these possibilities when defining your discount and advance rate.
That’s why there is no one-size-fits-all package for factoring contracts. An underwriter needs to analyze your client portfolio before approving your application and giving you a custom proposal.
COMPARING FACTORING COSTS
Why Won’t You Find Big Differences in Cost Among Agreements?
Unless you are a vast organization with a robust portfolio of creditworthy customers, you’ll get a similar proposal from most factors.
Whether the factor charges just one or multiple fees, you’ll find a similar overall cost once you compare quotes and do the math. The sector has recently standardized, and most experienced managers will offer you an industry-standard deal after assessing your company’s risk.
SO, WHAT ARE THE KEY CRITERIA THAT AFFECT THE DEAL YOU’LL BE OFFERED?
- Your customers’ creditworthiness
The better your clients’ credit scores and credit history are, the lower the charges you’ll pay.
- Your customer concentration rate
You’ll likely have to pay more if your portfolio comprises only a few clients (high concentration).
- Types of factoring agreements: Recourse or non-recourse
Full non-recourse factoring agreements, in which the factor has no recourse in the event of delinquency, are much more expensive than recourse factoring deals. In a non-recourse factoring contract, you may also need business credit insurance, which adds extra costs to the transaction.
- Non-notification deals
You’ll pay more if the factor waives its right to notify your debtors that an invoice was sold to the factoring company.
- No (or minimum) verification or monitoring
If the factor does not verify the debt or monitor the collection process, you’ll be required to pay much more in factoring fees.
- Your average collection period
The longer the average time you take to collect from your debtors, the more you’ll pay.
Comparing Value
When comparing agreements, you must also analyze what you’ll get for your money. Some companies only provide business funding. Others, typically called “full service,” include valuable add-ons such as free debtor credit checks and support managing receivables and collecting outstanding invoice amounts. These complimentary add-ons can save you significant money and allow you to concentrate on your strengths instead of worrying about monitoring payments.
Evaluating Reputation & Trustworthiness
References from long-term clients
To know how reliable a factoring company is, you must ask for references from people with a considerable history of relationships. They can tell you how helpful the managers are when cash flow emergencies arise.
Customer retention rate
Trustworthy factors have high retention rates, while unreliable ones do not. Ask managers for their average retention rate. How long a client stays with a company says it all.
Experience & Time in Business
Look for organizations that are at least 15 to 20 years old. A firm operating for that long likely has much experience solving working capital problems in various cases. It also has a very reliable source of business capital, assuring you they’ll always have funds to advance. Also, look for funders that have been steadily growing throughout the years. Commercial success is an excellent measurement of high customer satisfaction levels.
How to Compare the Quality of the Invoice Factoring Services Provided
Getting funding at a reasonable cost is essential, but having the cash when you need it is crucial. Your employees cannot wait for their salaries to be deposited, your vendors must get paid, and your company needs cash flow to operate efficiently.
When choosing a provider, you need to consider who will care for your needs in each stage of your relationship with the factor.
Pre-sale and approval stage
Imagine you need immediate working capital and are looking for a funder. During your first contact, you can either:
- Talk to a broker
A broker is just an intermediary who gets your information and then speaks with a funder to confirm your approval for invoice factoring. A lot of waiting when getting funds is urgent.
- Create an online account and wait to see what happens.
Some online factors can get you started without human interaction. To sign up for an account, you must use a web portal and connect your accounting software to their web application. A computer algorithm analyzes all your financial information from your software. The danger is that if you aren’t accepted as a client, you’ll have revealed all your financial data to a third party for nothing.
- Talk to a decision-maker
There are funders, like Gateway, where you’ll get direct access to a decision-maker from the start. A manager or director will listen to your situation and tell you immediately if you fulfill the requirements for factoring. If you do so, you can get a proposal in a few hours. You’ll instantly get personalized and fast attention to your business cash flow needs.
The type of relationship you’ll get is your choice from the very beginning. What kind of funder do you prefer?
Ongoing relationship
You’ll also need to think about your future everyday relationship with your factor during your evaluation process. In a working relationship, you’ll need to ask questions about factored receivables and invoice payments, get answers about your contract, request special funding, etc.
What you’ll ideally want:
- Customer service and dedicated account representatives are:
- Experienced
- Specialized in your niche market
- Reachable by phone when needed
- Direct access to directors when important issues arise
We hope you can use the information in this guide to find the best factoring company and financing option for your needs. Contact us, get a factoring quote, or apply for factoring. Our managing director will be happy to work with you to ensure that you get a reliable source of business capital for your operations.
If you have cash flow issues due to slow-paying customers, we would love to partner with you:
- Request a quote today, and get a proposal in 30 minutes.
- We’ll put you in touch with our managing director from the first contact.
- Same-day funding.
- Low monthly sales minimums or maximum amounts.
- Competitive fees.
- Short or long-term contracts.
- Minimum qualification requirements. No application fee.
- Flexible factoring services.
- Fuel card programs.
- Proceeds are directly deposited into your bank account on the same day through money transfers.
- We have accounts managers experienced in various sectors such as construction, freight, trucking, staffing, payroll financing, government, startups, etc.
- Maximum factoring lines and credit limits up to 10 million.
Please check this page for additional information about Gateway Commercial Finance and our transparent and highly confidential programs.
Good luck with your search!