By Grey Idol
A strong economy drives small business growth–we all know that. However, with a rise in new businesses, we also see an increase in the number of companies turning to factoring. Why? Because growing businesses need ready access to capital and factoring has proven to be a quick and easy way for businesses to get it.
The challenge for businesses is that not all factoring companies are created equal. Finding the best factoring company for your business can be a daunting task.
A quick Google search will reveal your problem: hundreds of factoring companies to choose from. However, upon closer review, you’ll see that they range broadly in size, experience, and expertise. Some serve specific industries and others might only serve a segment of an industry. You’ll also see that fee structures, contract terms and funding options can vary widely from one factor to the next.
Choosing the wrong company can cost your business valuable time and resources, and the possibility of alienating your best customers. When you find the right one, you have a valuable partner in the growth of your business.
Start narrowing your search by seeking answers to these questions:
1. Does the factoring company have experience in my specific industry?
You can quickly eliminate factoring companies that don’t ordinarily serve businesses in your industry. Having expertise in your industry–your type of business in particular–ensures that the factor is current with issues that can impact your business and uses a structure that’s compatible with your processes. Look for factoring companies with a proven and stable operating history within your industry.
2. How strong is the factoring company’s reputation?
Working with a factoring company is not unlike working with a bank. It’s about your money. It’s important to ensure the company is reputable as evidenced by many years of experience keeping promises and treating customers fairly. It’s a good idea to avoid companies that haven’t been in business long enough to establish a real reputation. That said, still do your due diligence on the ones that have been around for a while. Leverage sources like the Better Business Bureau and other review sites to ensure that other customers have had good experiences.
3. Is the factoring company associated with a bank?
Many factoring providers are independent financing companies, which means they must borrow funds from a third party to fund your invoices. As the middleman in the transaction, these companies often have to charge higher rates to cover their own borrowing costs. That doesn’t mean they’re always a bad choice, and many offer competitive rates and same day funding. However, if something goes awry with the factor or their third-party lender, your funds may no longer be available, putting your business in a pinch.
A factoring company that is backed directly by a bank, or is a bank itself, can operate as a direct source of funds. That means they do not need to borrow from a third party to fund the purchase of your receivables. With a bank factor, you’ll often find that the cost of funds is lower and the savings are passed on to you. Most banks are also regulated by the FDIC, which can offer you an additional sense of security.
4. Are their rates and terms competitive and fair?
Here’s some good news: The increasing competition in the factoring industry is putting downward pressure on rates. Because factoring rates are calculated based on a number of things, including the monthly volume of invoices you want to factor and the average size of each invoice, factoring companies have some wiggle room to compete with other providers.