How to Choose An Invoice Factoring Company
Evaluating services - it's not just about the rate, make a complete comparison
Whether your bank has suddenly become uncooperative, you've maxed out your credit cards, or slow paying customers have caused your cash flow to dwindle, you may be seriously considering the services of a factor in order to keep your business running smoothly. In every economic sector there are good and bad companies and the factoring industry is no different. Of course, there are many important aspects you should compare when you decide how to choose an invoice factoring company.
Sign Up Cost
Just as there can be origination fees connected to bank loans, there can be sign up fees involved when you contract with a factoring company. While some companies will charge a nominal fee or none at all, some factors will charge you up to $500 just to get started.
Hidden charges lurk in many businesses, and the factoring business is no different. While some companies will charge you nothing, some may add a $1.00 to $5.00 charge for merely processing an invoice.
Long Term Contracts
Just as you may not like your two-year agreement with your cell phone provider, you may not want to sign up for a five-year factoring contract. Not only will you lose control in the areas of mandatory fee increases, you may be unable to utilize the services of newer providers.
When an invoice factoring company accepts your business, they begin to count on your revenue. If, for any number of reasons, you merely decide to once again collect directly from your customers, you may be charged a penalty for not factoring invoices. Some companies will charge in excess of $10,000 if you quit.
Many factors require monthly minimums. If they spend their time investigating your business to determine if a factoring partnership will work, they certainly will look for a reasonable volume of business. Be careful to understand any penalties that will be levied if you fall under the required monthly minimums.
There are a couple of rates to consider. The first is the advance rate, which can range from one percent to 91 percent. This is the amount of money you'll first receive from a submitted invoice.
Next, be especially aware of the discount rate, as this is the percentage of money the factor will deduct from each invoice. This fee can range from 2 percent to almost 10 percent and it depends upon a variety of things.
Invoice Factoring can be a great tool for your business as it can even out cash flow and allow you to operate your business more efficiently. Just do your due diligence to ensure that you’re getting the best deal.