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What to Look for in a Factoring Company?

Published 5/10/2005

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There are six major attributes you should look for in choosing the right factoring company for your business. A successful factoring company should have a quality credit department, a professional collection staff, a long track record, industry specialization, financial strength, and up to date technology in keeping their customers informed with real time data.

Unlike a bank or a finance company, a factoring company has a day-in, day-out relationship with its client, so choosing the right factoring company boils down to who can you get along with. Sometimes, the answer to this question is the factoring company with the lowest discount fee and sometimes it will be the factoring that meets some other need better than the one with the lowest fee.  Ultimately, determining the overall cost can prove difficult, so you might want to consider other important variables. In the final analysis, factoring is not a commodity item like a mortgage loan.  There are many variables besides just the stated discount fee that will come into play when selecting the factoring company best suited to your company's needs. These distinctions are seldom pointed out in the factoring proposal, so here's your opportunity to pick the perfect factoring company for you.

Does the factoring company have a credit department?

A factoring company that has a great credit department, for example, might be your pick if you are looking for a factoring company that will help you make prudent credit limits for your customers. A factoring company that does not have a fully staffed credit department, likely will not approve appropriate limits and as a result, may expose your company to inappropriate levels of risk.  On the other hand, a factoring company that doesn't approve enough credit to accommodate your needs may unnecessarily restrain your company's ability to grow.

Does the factoring company have a collection department?

On the other hand, a factoring company with a fully staffed collection department might be your pick. Most factoring companies assign the task of collections to the account representative. It might surprise you to learn the many factoring companies don't even have a collection department. If you are serious about finding a factoring company that takes its job of collecting receivables seriously, the factoring company will assign two points of contact to you—an account representative AND a collection specialist (accounts receivable management). One person cannot perform both functions as well as two.

Does the factoring company have a long track record?

A factoring company that has been in business more than ten years likely has the experience you need to provide an adequate level of service.  A factoring company that has weathered multiple business cycles demonstrates staying power, but not necessarily solid capitalization.  If in doubt, ask your factoring company or a factoring company you are talking to for bank references or a thumbnail sketch of their financial condition.  Most importantly, ask your factoring company for client references—preferably clients in your industry.

Is the factoring company a specialist in your industry?

You may be looking for a factoring company that knows your industry.  Industry specialization is extremely important.  If you own a trucking company, you should seek out a truck factoring company –in other words, a factoring company specialist for trucking and transportation.  For example a trucking factoring company will be familiar with your freight brokers and shippers, because likely, a truck factoring company will already have its own first-hand experience with tens of thousands of freight brokers. If a truck factoring company already knows your customers, you will save money, because you won't have to spend money on credit reports.

If you own a staffing firm, you should be considering a staffing factoring company or a factoring company commonly referred to as a full service factoring company that not only can provide you with traditional accounts receivable factoring, but also many back office functions such as payroll checks, payroll deposits, payroll reporting, payroll software, invoicing and invoice mailing. Often, full service factoring (companies) for staffing firms provide all these services under one roof and for one fee. Sometimes the factoring company will outsource some back office functions to an affiliate or strategic partner with greater expertise. These third-party arrangements are common and perfectly acceptable, provided the client is informed about all work that is outsourced to third parties and the client approves.

Is the factoring company the right size for your company?

You might be interested in a small or a large factoring company, depending on your philosophy.  Your best bet may be a factoring company that is somewhere in between—small enough to provide personalized service and access to top management, but large enough to provide financial stability, the ability to accommodate your needs, and the ability to weather tough economic times.

A factoring company that sends an executive officer, or top manager out to visit you may be of interest to you.  Very few factoring companies do so.  If it is important for you to know who you are dealing with, ask the factoring company you are talking to if they will send an officer or top manager out to visit you.  A very large factoring company likely will not be able to comply with such a request (unless they are located right down the street).  If you are lucky, you might get a visit from a salesman.  It is unlikely that the factoring company that sends a salesman to visit you will give that salesman any operational authority, so it's best if you can get an executive, officer, or top management person.

A factoring company that is too small may not have the financial resources to satisfy your needs or may be too conservative in making decisions that effect your business.  A factoring company that is too small may be too restrictive on which of your customers they will approve and for how much.  A small factoring company also may not have the capital to purchase all your receivables.

Does the factoring company embrace technology?

More and more, clients are demanding factoring companies to provide them with the most technologically advanced reporting systems.  You may want to avoid a factoring company that does not provide access via Internet to your factoring data.  You may also seek out a factoring company that allows you to obtain credit decisions on line via Internet.  A factoring company that embraces new technologies will ultimately save you money.  For example, if you have to send all your invoices and a full set of copies to your factoring company via overnight courier, you are probably picking up the tab.  If your factoring company can accept digital copies via e-mail or can scan your originals, your packages will be less costly to send.  A factoring company that can handle your customers' EDI system is also a plus.

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