8 Questions to Ask a Factoring Company Before Partnering with Them

Accounts Receivable Financing.

At some point, every business owner will face the challenging situation where more money is flowing out of their business than is flowing in. This cash flow shortage can quickly make it difficult to cover payroll and day-to-day operating expenses, not to mention rapid growth and expansion needs. If your business is experiencing tight cash flow, chances are you have considered, or have at least heard of, factoring as a funding option.

What is Invoice Factoring?

Far from a new cash solution, invoice factoring dates back thousands of years to ancient Mesopotamia. This financing tool allows businesses to sell their outstanding accounts receivable to a factoring company (the factor) at a discount. The factor then quickly provides an advance and assumes the responsibility of collecting payment from the customer. Once the customer pays the invoice, the business receives the remaining amount, minus a small factoring fee.  

The flexibility and capacity of factoring to help your company grow at a faster pace than it could on its own has made it an increasingly popular method of financing. Today, there are more factoring companies to choose from than ever before. While many are reputable and reliable business partners, others lag in key areas like support, technology and transparency. Before committing to working with a factoring company, there are a few questions you should ask to ensure if they will be a reliable partner for your business.

The team at Security Business Capital has compiled a list of eight important questions to help you get started:

How quickly can my business secure funding?

One of the most attractive benefits of using invoice factoring is that you can secure next-day, or even same-day, funding. Instead of waiting 30, 60 or even 90 days to receive payment from your customers, you can factor those invoices and have cash in your business’ bank account in as little as 24 hours. When comparing factoring companies, make sure you can secure the money you need, when you need it most.

What is your factoring advance rate?

The cost of invoice factoring is determined by several different factors: your business’ industry, your sales volume, and the alternative lending company you choose. For most industries, the advance rate typically ranges anywhere from 80%-95% of the invoice value up front. The remaining balance is then remitted once the invoice is paid, minus a fee. While the fees involved will vary from factor to factor, it tends to fall somewhere between 1-3%.

What industries and business types do you work with?

Thanks to advances in technology, factoring companies have been able to target the needs of specific industries, making this financial tool more accessible than ever before. Oil and gas, trucking, staffing services, construction, business services, government contractors and manufacturing and distribution are just a few of the industries that greatly benefit from factoring and frequently use these services.

Do you offer both recourse and nonrecourse funding?

There are two different types of factoring: recourse factoring and non-recourse factoring. Recourse factoring is the most common and means that your business is obligated to pay back any invoices that the factoring company is unable to collect payment on. With non-recourse factoring, the factor assumes most of the risk when collecting on an invoice. Because of the added risk, non-recourse factoring fees will be slightly higher.

Do you require every invoice to be factored?

Some factoring companies require their clients to submit all of their customer’s invoices for factoring because they want to be sure to assume the least amount of risk possible; this requirement will vary from company to company. However, you may not want to factor every invoice, for one reason or another. You may only wish to factor your slower paying customers, for example. With Security Business Capital, you maintain the flexibility to choose which credit approved customers you wish to factor, and which invoices you want to factor from those customers.

What kind of support does your team provide?

A reputable factoring company will not only provide immediate capital, but also exceptional back-office support that saves you valuable time, money and resources. When talking with a potential factoring partner, ask for specifics on the other services they provide. What is the factor’s process for customer collections? Will they assist you in checking payment progress and maintaining records? Do they provide perks like free credit checks on existing and new customers? Ideally, they will act as an extension of your accounting department, allowing you to focus on growing your business and chasing opportunities.

Can your funding match my company’s rapid growth?

One of the biggest advantages of invoice factoring over a traditional lending option is that the funding through factoring grows with your business. The amount available is only limited by the number of eligible invoices your business has to factor. So, as your business grows and builds a strong relationship with the factor, your business’ credit line also increases. Just make sure that the factor you choose has the experience and financial capacity to match your company’s growth.

How will you handle my customers?

Many business owners understandably worry about what their customers will think when they receive notice of their factoring. It is very likely that your customers are already familiar with factoring; some of them may even use a factoring service themselves. In truth, the factor will only reach out to your customer from time to time to confirm details. The key is to make sure the factoring company you partner with prioritizes communication that is both professional and courteous – their services should strengthen relationships with your customers.

Security Business Capital Invoice Factoring Services

If you are searching for an invoice factoring company to build a long-term and productive relationship with, consider the dedicated team of professionals at Security Business Capital. Based in Midland, Texas, Security Business Capital is a premier invoice factoring company with years of experience. Our team of experts specialize in helping businesses secure the funds they need to operate smoothly, grow their business and take advantage of opportunities. Oil and gas, staffing, manufacturing, distribution, transportation, and business services are just a few of the industries that regularly use our solutions to generate cash on hand.

If you have any further questions about invoice factoring or how our services work, contact us today for a free quote and/or consultation.