How to Pick the Best Factoring Company for Your Business

With all the fine print details involved in a factoring agreement, business owners and managers may find it difficult to compare factoring companies’ proposals.

Whether or not you end up requesting a proposal from us, we would like to give you a few valuable tips when it comes to evaluating factoring companies. This guide has been specially designed to help business people like you pick the provider and factoring agreement that best fit your business needs.

Learn to Compare Invoice Factoring Companies

Here are the steps you should take when comparing factoring companies:

  1. Distinguish Factoring Companies From Expensive Online Lenders
    • Are you really dealing with factoring companies?
    • Or are you dealing with online lenders?
    • Why should you care?
  2. Determine The Truth About Published Factoring Rates
    • Why what you see likely is not what you’ll get
    • Why comparing factoring rates is not an easy task
  3. Compare costs in factoring agreements
    • What affects your factoring costs?
    • What do you get for your money?
  4. Evaluate a Factoring Company’s Reputation
    • Beware of best factoring companies lists
    • How reliable are comparison articles and endorsements?
    • What should you look for in a factoring company?
  5. Evaluate Service Quality
    • Approval process: when experience and decision making is crucial.
    • Who takes care of your everyday factoring account needs?
The learning process begins here:

If you do a simple online search for “factoring company,” you’ll be presented with a mix of factoring companies and online lenders. You may think Google and Bing know the difference, but unfortunately they don’t. These companies try to show people results based on what they think is the searcher intent (in this case non-bank funding for your business), so they’ll show some factoring companies, but will also include alternative options.

compare factoring companies

These alternatives often include comparison sites, endorsement articles, lending marketplaces, merchant cash advance companies, invoice financing companies, and just plain online lenders offering small business loans.

At this point you may be wondering why this matters, as they all may look like accessible funding options to you. Well, there are several reasons for caring about this, but here is the most important one:

These other funding alternatives are always more expensive than factoring.

Therefore, if you care about your company’s health and future, you need to learn to distinguish the difference between factoring companies and online lenders.

What is a Factoring Company?

A factoring company is a business that purchases outstanding receivables from B2B companies, providing cash advances in until the invoices are due or collected.

Factoring companies:

  • Buy outstanding receivables for products or services that have already been delivered
  • Work only with businesses that sell to other businesses
  • Are not lenders and do not provide loans
  • Do not require installment payments
  • Care about the creditworthiness of your company’s customers, NOT about your personal or company’s credit history

Now, let’s learn to differentiate factoring companies from other funding companies.

How to recognize online lenders

There are several types of online lenders, also known as Fintech companies. Many types exist, but the most common are:

  • Invoice financing companies
  • Merchants cash advance services
  • Lending marketplaces
  • Short term small business loan companies
  • Companies that offer “lines of credit” that require daily or weekly repayments
online lenders fintech

To recognize online lenders, simply look for one or more of the following characteristics:

  • They offer loans.
  • They offer advances based on your business’s future sales.
  • They ask for collateral or personal guarantees.
  • Your personal or business credit score determines accessibility and the rate you get.
  • You are offered 100% advances.
  • You are required to make daily, weekly or monthly installment repayments.

So, unless you want to add debt to your ledgers, pay very high fees, and have installment payments that periodically decrease your business cash for operations, you should work with a factoring company instead of these lenders.

Next let’s talk about advertised rates.

Why You Cannot Trust Advertised Rates

After doing a search, visiting factoring company websites, and clicking on ads, you’ll find offers like these:

advertised factoring rate comparisons
  • 0.49%
  • 1%
  • 0.5 to 4%

You’ll likely find 0.49% to be the most attractive rate, but is that really the best option for you? Can your business get approved for that rate?

The truth is, there’s no way to answer those questions just by looking at information published on a website. For starters, you don’t know the rate terms. Are they yearly, monthly, daily, or every 10 or 20 days?

In reality, most advertised rates are just teasers to get your attention. In fact, very few companies qualify for the rates you see published on websites and digital ads.

There is no one-size-fits-all package when it comes to factoring agreements. Factoring companies need to analyze some very specific information about your business, especially your customer portfolio, before offering your company a proposal.

Let’s analyze the variables that affect the cost of factoring, so you’ll have a better idea of the rate your company can get.

Comparing costs from different factoring agreements

In a factoring transaction, the factoring company buys invoices that represent debt owed by a third party (your customer), not by your company. This involves taking the risk that your customer won’t pay, in addition to the risk that your company won’t be able to pay back the advance if this happens. The factoring company considers these possibilities when defining your rate. As a general rule, the higher the risk involved, the more you’ll pay for the services.

What affects the risk to the factor?

  • Your customers’ creditworthiness

The better your customers’ credit scores and credit history are, the lower the rates you’ll pay.

  • Your customer concentration rate

If your customer portfolio is comprised of only a few customers (high concentration), you’ll likely have to pay a higher rate. Learn to calculate customer concentration here. (link)

  • Non-recourse agreements

Full non-recourse agreements, in which the factor has no recourse in case of delinquency, are much more expensive. You may also be required to obtain credit insurance, which adds extra costs to the transaction.

  • Non-notification factoring deals

If the factor waives its right to notify your customers that an invoice has been sold, your company will pay higher rates.

  • No (or minimum) verification or monitoring

If the factoring company does not verify the debt or monitor the collection process, you’ll be required to pay much higher factoring fees.

  • Your company’s average collection period

The longer the average time your company takes to collect from your debtors, the higher the rate you’ll pay.

Why You Won’t Find Big Differences in Factoring Cost?

Unless you are a really big company with a robust portfolio of creditworthy customers, you’ll get a similar proposal from most factoring companies.

Whether the factor charges one total rate or a multiple fees, you’ll find a very similar overall cost once you do the math. As the factoring industry has standardized in recent years, most experienced factoring companies will assess your risk and offer you an industry-standard deal.

The only exception to this rule would be online factoring companies that require you to create an online account in order to request funding. These companies use computer algorithms instead of real people to evaluate your company. To compensate for the additional risk of using this new technology, they charge much higher fees than the average factoring company.

Here you can learn more details about factoring cost, fees and rates.

Comparing Service Value

When comparing factoring agreements, you also need to consider the services that you’ll get for your money. Some factoring companies offer only funding services. Other factors, typically called “full service” factoring companies, include some valuable add-ons such us free debtor credit checks and help with receivables management. These complementary receivable management services can save your company a significant amount of money and help you concentrate on what you do best instead of worrying about monitoring payments.

Evaluating Companies’ Trustworthiness

If you perform a web search you’ll find several websites offering lists of best factoring companies or company comparisons and recommendations. People mistakenly tend to trust those lists and endorsements without further analysis. Since these sources are found in Google search results, they should be trusted, shouldn’t they?

The truth is that most of these websites, including factoring company reviews and recommendations, are not reliable.

The reason is simple; the companies mentioned in the article pay the website owners to influence readers who are researching factoring. It is merely advertising.

Whether it’s a good factoring company or not, the more money it has to invest in marketing and referrals, the more biased recommendations it can get. That’s the bottom line.

Here is a list of the type of biased websites you should be aware of and the reasons they should not be trusted:

Lending marketplaces

This type of website offers an array of funding providers, including several companies that are not factoring companies, such as small business lenders and invoice financing companies.

The website will prompt you to complete a search function defining your needs. Once you submit it, you’ll get a list of the “best” options available.

Here are several reasons why these sites cannot be trusted:

  • Many of these sites are partnered with the companies suggested.
  • They get a paid commission when you close the deal.
  • They may get a percentage of the fees you pay to the factor.

Also, these lending marketplaces only recommend Fintech companies. Fintechs, the new wave of online-only financial companies, offer a mix of factoring, invoice financing, loans, and merchant cash advances. Therefore, thousands of traditional factors are excluded from this list.

Don’t be deceived by marketing tricks. Fintech companies do not usually offer the best options for your business and will very likely cost you more.

Best factoring companies lists

These websites offer lists of “best factoring companies” and suggest that readers consider them when picking a factor. The main problem with these sites is that they do not explain the criteria for determining which factoring companies are the best. Companies that make the list are those who pay the website owner in one of two ways:

  • They pay an advertising fee or
  • They offer an affiliate program in which the advertiser gets paid when the visitor is taken to the factoring company website and a factoring agreement is signed.

Before trusting these lists, check if they specify what parameters are used to qualify a company as the best and if they provide reliable sources to support their opinions. “Because we get paid to do so” is not a good reason for you.

Companies comparison articles and blogger reviews

There are a number of bloggers and writers who recommend the same group of companies over and over again. You will likely find these websites when looking for factoring companies on a search engine. As we mentioned, these articles about factoring companies include companies that are not factors, but rather other types of fund providers. In addition, the Fintech companies being compared are always the same. I guess at this point you have already recognized the trend; it’s all about big marketing money.

Other online endorsements and TV endorsements

These endorsements are simply paid advertisements. Any company with money to spend on marketing can be featured on important websites or TV shows.

How to Know When a Factoring Company is Dependable

So, if the list of “best” factoring companies and third party recommendations are not to be trusted, how do you know if a company is trustworthy? Here is a primer on what you should look for in a factoring company:

References from long-term customers

In the factoring industry you’ll find three types of customers.

  1. The first type consists of businesses that sell one or two invoices to a factor and then the relationship is over. This is usually called spot factoring, and it is rarely used.
  2. The second type, which represents typical factoring customers, consists of businesses that temporarily (usually from one to three years) need to factor invoices until their cash flow is stable and their financial situation is good enough to access bank financing.
  3. The third type, which is also very common, consists of companies in industries such as staffing and transportation that use factoring as a regular source of cash flow, sometimes indefinitely, even complementing their bank credit lines.

Spot factoring clients, if approved, do not interact much with the factor because their mutual relationship is very short. If you want to know how reliable a factoring company is, you need to ask for references from customers that have a considerable relationship history with the funder. They will be able to tell you how helpful the factor is when emergencies arise.

Customer retention rate

Trustworthy factors have high customer retention rates, while unreliable factors do not. Ask factoring companies for their average customer retention rate. How long a customer stays with a company says it all.

Factoring company experience

Look for companies that are at least 7 to 10 years old. A company that has been in business that long very likely has a lot of experience solving cash flow problems in a wide variety of business environments. It also has a very reliable source of funding, which assures you they’ll always have funds available to advance. Also, look for companies that have been steadily growing throughout the years. Business success is a great measurement of high customer satisfaction levels.

How to Compare the Quality of the Services Provided

Getting funding at a reasonable cost is important, but it’s crucial to have the cash when you need it. Your employees cannot wait for their salaries to be deposited, your vendors need to get paid, and your company needs cash flow to operate efficiently. It’s important to have the right people taking care of your business needs when emergencies arise.

When picking a factoring company, you need to consider who will take care of your needs in each stage of your relationship with the factor.

Pre-sale and approval stage

Let’s imagine you are in need of immediate funding and looking for a factor. When you contact a company for the first time you can either:

  • Talk to a sales person or broker

A salesperson or broker is just an intermediary who gets your information and then speaks with a factoring company manager or an underwriter in order to confirm your approval for factoring. A lot of wait 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. In order to sign up for an account, you are required to connect your accounting software to their online platform. A computer algorithm pulls all your company information from your software and analyzes it. After a day or two the system lets you know if you qualify or not.

The risk is that if you don’t get approved, you’ll have revealed all your company’s financial data to a third party for nothing. Furthermore, you probably won’t receive an adequate explanation for the rejection.

Even if you prefer not to interact with human beings, there will be times when you want someone to listen to your needs and help you find alternative solutions to your cash flow emergencies.

what is a factoring company
  • Talk to a decision maker

There are companies, like ours, 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 right away if your business qualifies. Then you can get approved and issued a proposal in a couple of hours. You’ll get personalized and fast attention to your needs right away.

The type of service you’ll get is your choice from the very beginning. What kind of relationship do you prefer?

Ongoing relationship

When evaluating potential factoring companies, you’ll also need to think about your future everyday relationship with your funding provider. In a working relationship, you’ll need to ask question about payments, request factoring for atypical customers, get answers about your agreement, request special funding, etc.

These kinds of interactions will help your business grow, so it’s important to be able to trust the people at the factoring company.

What you’ll ideally want:

  • A dedicated relationship manager that is:

    1. Experienced
    2. Specialized in your industry
    3. Reachable by phone when needed
    4. Located in the US and with a broad knowledge about our country’s business environment
  • Direct access to decision makers when important issues arise
what is a factoring company What you don’t want:

  • Inexperienced staff working from overseas call centers
  • Lack of phone accessibility (i.e. having to reach your factor by email or customer support forms and waiting for a response)
  • Computer algorithms making approval and funding decisions

We hope you can take advantage of the information contained in this guide and use it to find the best factoring company for your business. If you decide to contact our company, our managing director will be happy to listen to your story and work with you to build a reliable source of cash flow for your company.

If you would like to know more about our company and our highly confidential factoring services, please check this page.

Good luck with your search!

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