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How to Evaluate Factoring Companies for your Small Business

Posted on January 04, 2018 in Factoring

Have you been searching for a way to get a short-term loan for your business without using a bank? Many businesses find long-term debt financing to be ineffective compared to a short-term loan. Sometimes called a micro-loan, the lending institution that you choose will determine how much interest you pay for the cash you receive. In general, the quickest way to get cash upfront is through a factoring company. From the perspective of a small business owner, short-term financing through factoring businesses can be an important tool for getting emergency cash when you need it.

Businesses that search for short-term loans end up using factoring companies

Outside of the world of banking, companies that help businesses get short term loans are often specific to certain industries. For example, there are factoring companies that focus on the temporary staffing or the trucking industry. In most cases, the collateral used will be an unpaid invoice or invoices. This is much more convenient than the system a bank uses where physical property is the only form of collateral. However, most factoring companies specifically focus on funding invoices on credit terms since almost every company has employees, fixed overhead and payroll expenses while waiting for checks to come in.

How to Evaluate A Factoring Companies for your Small Business

Accounts receivable financing is an ideal solution to improve cash flow if it takes your company 30 days or longer to collect on invoices. However, it is not the right choice for every type of business. A factoring loan is usually the right choice if:
 

  • You are having difficulty paying suppliers, keeping fixed overhead afloat or trouble making payroll
  • Your company can't attract new clients because it can't offer credit terms your clients require
  • Your customers pay invoices after the due date

Your Next Steps

Once you have decided that accounts receivable financing is right for your company, your next step is to evaluate potential factoring companies. The first thing to look at is whether the factoring company specializes in a certain type of business. If you own a trucking fleet, you don't want to work with a lender that knows nothing about the trucking business. Even if the small business factoring company advertises as a general lender, inquire about the types of businesses it has the most experience lending to.

Experience Matters

Ideally, the lender you choose should have at least three years of experience with financing receivables. You can get a good feel for the company's track record by requesting references from other customers in your line of business. The references you contact should have a similar sales volume as your company.

Be Certain That You Understand Contract Terms

Obviously, you want to hire a finance and factoring company that can offer you favorable rates and contract terms. If you have never taken out an accounts receivable loan, it can be difficult to decipher what you are reading. It is always best to clarify these terms before you sign a legally binding agreement. This is also a great time to use your business negotiation skills to get the best possible rates and terms. It will make it easier for you to evaluate all bids if you request each factoring company to submit proposals in the same format.

Financing Receivables is Available in Days, Not Weeks or Months Like Banks

It can be quite an ordeal applying for a business loan at a bank. Even if your company is deemed creditworthy, the process is often complex and time-consuming. When you're waiting on money from your accounts receivable invoices, the last thing you want to do is to wait for a bank loan to come through to cover the funds. The average bank loan can take anywhere from several weeks to a month or longer to get approved. You often have to begin repayment as soon as the following month at an interest rate that may not be favorable. For many companies, obtaining an accounts receivable loan through a factoring company makes more sense.

Applying for Receivable Financing with 1st Commercial Credit

1st Commercial Credit operates in the United States, the United Kingdom and Canada. We help businesses with cash flow problems get the financing they need quickly. For first-time customers, this is generally within three to five business days. You could have your money within one business day on future loans. We work with several different types of industries, including government contractors, temporary staffing agencies, trucking companies, healthcare providers and more than a dozen others.

To get the process started, you need to complete a two-page application and submit it to us as soon as possible. We don't require you to put down any other collateral except the receivables or  have a perfect business credit rating. Since we are paid by your customers, we are more concerned with their credit worthiness. The process works best when you sell us invoices that are normally paid on time. However, if payments are not paid by the due date, we at 1st Commercial Credit handle all collection activity. In addition to the invoices you want to factor for initial setup, we require proof of business incorporation, a customer list, an aging report from your accounts receivable department and your purchase orders or rate confirmation agreements.

Receive Your Money Promptly and Use It Any Way You See Fit

After we approve your accounts receivable financing request, you are free to use the money however you deem appropriate. New businesses often use invoice factoring to increase cash flow to grow the business. Established businesses that have seasonal lulls depend on 1st Commercial Credit to get through the slow times without going into debt. Our solutions are more affordable and timely than anything you could get from a bank.