A factoring company is a company that purchases accounts receivable, such as invoices, from another company at a discounted rate. The transaction also passes ownership of all rights and risks associated with the receivables and the responsibility for collecting the money owed from the debtor.
Choosing the right factoring company is not an easy decision to make. Many aspects need to be considered before a company decides on which factoring company to use. Before deciding on which factoring partner you want to use, you must research all of the points below.
Factor's Comfort Zone - Although on the face of it, the intricacies associated with the varied amounts of invoice factoring are similar even from a low level of $10,000 up to a few million dollars; this is not always the case in reality. Different companies have differing comfort levels with regards to the value of the invoices they are purchasing. It is good practice to ask a particular factor what value of invoicing their typical clients sell to them.
Monthly Minimums - The majority of factoring companies employ monthly minimum values on invoices that they will accept. If a company is unable to meet the minimum required values of invoicing per month, then that company may be billed an amount to make up the deficit. It is important to choose a company that has a minimum value way above your business's likely accounts receivable to be sold.
Contract Duration - The contract length can have a bearing on the fees associated to your business's account. Although most factoring companies require you to sign a minimum one year contract, if you were to sign for a longer duration, you may save money on the fees involved. If the situation occurs that your business does not need the use of a factoring company, make sure in the contract that you will be able to terminate the contract early without major financial loss.
Fee Structure - Fees vary with different factoring companies in terms of amounts and complicatedness. Depending on the value of the accounts receivable that you wish to transfer to the factor, fees range from around 3% to around 1.5%.
Level Of Service - One vital point to remember is that the level of service that you receive from one factoring company will not always be the same as another. Generally speaking, you get what you pay for, and this can help you dramatically as lower fees may seem like a good idea but a better level of service for more money is, in most cases, the more sensible option.
In summary, it is important to research all areas of the company you wish to be partners with and the contract that will bind you to them.
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