How to
Select a Factoring Company?
How
do I avoid the time consuming process of winnowing through all the
factoring companies out there, yet still get the best terms for
my business?
Great
question! Especially since there are SO many bad factoring companies
out there. And, we have a great answer to the question, we think.
We'll
show you how to spend very little time and effort, yet still get
the answers you need to make an intelligent decision.
But
first, let's discuss two important issues: 1) Factoring Brokers,
and 2) Location.
Factoring
Brokers
What
a great idea, you might say. I'll do what I would do with a home
mortgage, and use somebody who'll do the legwork to find me the
best rate.
Sounds
great, but the sad news is that we have not yet met a good factoring
broker.
What
do we define as good?
- They have
spoken to at least 50 different invoice factoring companies to
identify the ones that deliver high quality service and great
terms.
- They have
already winnowed down that list to a small number they believe
in, and they are very very familiar with the terms and rate structures
of those factoring companies they really like…and those terms
and rate structures are very competitive.
- They allow
you to fill out one online application, and they use that information
to pre-fill the applications of the factoring companies they suggest
you apply to.
- They keep
in touch with you during the factoring company's application process,
to make sure you get the service you expect.
- They follow
up with you after you are using a factoring company, to verify
that the factoring company is delivering great service.
By
the way, if you know of somebody who you think meets the above definition
of a great factoring broker, please email
us to let us know. (Please note that if you think you yourself
are a great factoring broker, then please
email us the names of 5 very satisfied customers who can act
as references. We promise to follow up with them and then contact
you with summary information.)
Location
You
may be tempted to go with a local invoice factoring company.
That
seems to make sense, because you know you can go right to their
office if a problem occurs. And, you'll have an in-person relationship
with their representative, so if something goes wrong, you know
who to call.
There
is only one problem with this: there really aren't that many great
small business factoring companies out there. Nationally, there
may be only a dozen or so. Maybe fewer. So, if you go with a local
factoring company, chances are good you'll pay more than you should,
or you'll get worse service than you deserve…or both.
Our
suggestion: search nationally using the web. If the best invoice
factoring company for you happens to be local, great. If it isn't,
just make sure they provide great phone support, and make sure you
get ASSIGNED a representative who you can contact toll free 5 days
a week and who is available at least 5 hours a day.
By
the way, if you have had a really fantastic experience with a factoring
company, please
email us to let us know, and include your name and phone number.
When we see the same factoring company name pop up more than a few
times, we take notice.
The
Power of the Web
The
best way to select from among the hundreds of invoice factoring
companies out there is to use the internet.
Here's
the beauty of this approach: you can email a detailed questionnaire
to a half-dozen companies. Let THEM spend their time telling you
what they can do for you, in a consistent no-nonsense format. Once
you've got that information, you can spend your time with just two
or three.
By
the way, we'll give you a really great receivables factoring company
questionnaire.
Now,
there is one caveat to what sounds like a great process. (Well,
there is probably more than one caveat, but this is a big one).
It is perfectly reasonable for a receivables factoring company to
respond to any question with the following phrase:
"It
depends. Please fill out our application and we'll let you know."
Why
is that reasonable? Well, their price/terms/process often depend
on the risk they take and the dollar volume you would expect to
process with them.
So
what do you do in that case?
Luckily,
you'll still be able to tell quite a bit from the WAY they respond
to that questionnaire. The more detail you see in their response,
the more attention you should pay to them. Also, it is really important
to know if they allow you to fill out a quick online application.
If you can get answers to your questions by filling out a short
online application, that's a very different story than somebody
who says they'll give you answers to your questions only if you
fill out a 30 minute paper application.
What
about those sites that submit your application to 4, 10, or 20 different
factoring companies?
You
may come across sites that allow you to fill out one online application
and then they email it to several invoice factoring companies who
get back to you directly.
We're
not advocates of such sites. The problem is that they unleash a
torrent of phone calls to you from account receivable factoring
companies who may or may not have a price or terms or process that
you are comfortable with. It is MUCH better if you are in control
and YOU demand answers via email first to a consistent and detailed
questionnaire. That way, you can decide which receivables factoring
companies you want to spend time with.
How
do I identify which factoring companies I should email my questionnaire
to?
A
good source is a site called, not surprisingly, www.factors.com.
The account receivable factoring companies on that site have to
pay to participate, and factors dot com does not screen them in
any way, but at least you'll get a list of emails to start with.
We
would also recommend sending a questionnaire to www.inzap.com
(the email is support@inzap.com).
Inzap provides web technology to help some of the best invoice factoring
companies reduce their costs and improve their processes. As a result,
they have developed a unique set of invoice funding services that
are worth comparing to the traditional factors out there. We are
affiliated with Inzap.
Finally,
try the Commercial Finance Association at www.cfa.com. If you go
to this site and click on "Member Roster" and then click
"By type of financing", you should get a list of companies
that you can include in your email list. This site is less comprehensive
than factors dot com (mentioned above) but it does give some helpful
information about each factor.
By
the way, even the factors dot com site and the cfa site mentioned
above offer to email your information to dozens of factoring companies,
who will then waste your time by calling you whether you want them
to or not. Our advice: don't use that feature of either site. Control
the process yourself.
What
should the factoring company questionnaire say?
To
make this easy for you, we've developed a great factoring company
questionnaire that you can copy and paste into an email to send
out. You can modify it in any way if you wish.
Here
it is:
INTRODUCTION
TO FACTORING COMPANY QUESTIONNAIRE
To
Whom it May Concern,
Our
business is interested in your account receivable factoring service,
and we would appreciate it if you would email us some more details
about how your service works.
Let
me first tell you briefly about our business:
What
we do: [Insert a one or two sentence description of your business
here.]
Our
customers: [Describe your customers (a couple of sentences) in terms
of industry and size. Naming your largest customer and their share
of your business would help, but may not be needed at this stage.]
Our
total receivables now: [Just quote your current A/R balance, since
this helps factoring companies screen you out if they cannot work
with a business of your size.]
Our
expected current/future need: [Briefly describe how much financing
you think you'll need now and in the near future, in dollars or
dollars per month.]
Our
average invoice size: [Mention here your estimate of the average
size (your monthly revenues divided by the number of invoices issued
monthly, roughly) of the invoices you would like to fund. This helps
factoring companies quote you a range of prices, and it also helps
them screen you out if they cannot work with small invoices.]
Is
cash needed before or after invoice is issued?: [Mention here whether
or not you need funding before you issue an invoice. If you do need
funding before an invoice is issued, the price will be much higher
and the likelihood of approval very low.]
So,
if you could please answer the questions below and email back your
responses, we would appreciate it. There is no need to call us at
this time, but please provide your phone contact information so
that we can contact you based on your responses to the questions
below. Thank you.
FACTORING
COMPANY QUESTIONNAIRE
Based
on the information we provided above, what is the *range* of prices
that you would quote us, expressed as a percentage of each invoice
amount (not as a percentage of the advanced amount)?
Based
on the information we provided above, what is the *range* of advance
rates that you would quote us, expressed as a percentage of each
invoice?
What
is your application fee?
What
is your set-up fee?
What
is your monthly/quarterly/annual/or audit fee?
Do
you require a minimum dollar volume of factored invoices? If yes,
what is it?
Would
you ever charge us if we went below a minimum expected volume? If
yes, please describe the nature of that charge.
If
we quickly terminated our agreement with you (say, if we terminated
after one or two months of usage because we were unhappy or didn't
require your services anymore), would there be a charge for that?
If yes, please describe the nature of that charge.
Please
describe any other per-transaction fees, such as a fixed per invoice
fee, a per check fee, or a fee associated with wiring or electronically
depositing funds into our bank account.
With
your factoring service, do I send the invoice directly to my customer
or do I first send it to you for you to send to my customer?
How
do I communicate to you which invoices I want factored?
Do
I have to factor all my invoices, or can I only factor some of them?
When
the invoice is sent to my customer, will it have something stamped
on it that says something similar to "factored" or "this
invoice was purchased"?
Will
you send a letter to my customers that discusses the fact that you
have purchased my receivables or that says that sending checks to
me will not discharge their obligation to pay the invoice?
About
how long, on average, does it take you to approve one of my customers
for funding, and to establish a credit line for them?
What
is the process you use to confirm that an invoice is valid and ready
to be funded?
About
how long, on average, does it take for you to fund an invoice after
I have issued it?
Do
you fund invoices on a daily basis, or do you batch fund on a less
frequent basis, such as once a week?
How
often do you typically make collection calls to my customers? Please
describe that process.
Will
my customers need to change the Payee name on their remittance checks?
Can they make the checks out to me, or must they be made out to
you?
Will
my customers need to change the remit-to address on their checks
to your lockbox address?
Once
you receive a check from my customer, how soon after that will I
receive the portion of the invoice amount that you had not advanced
to me yet?
If
our customer does not pay our invoice, are there ever *any* circumstances
under which our company would be responsible to return the funds
that you advanced to us?
If
our customer does not pay our invoice, and our company is unable
to return the funds to you, are there ever *any* circumstances under
which one of our company's owners would be personally responsible
to return the funds that you advanced to our company?
We
may be interested in getting a specific quote from you that defines
the price and terms under which you would factor our invoices. Please
describe the process I would need to go through to get that quote.
Please let me know if I can just fill out an online form (without
submitting other documentation), and if so, please provide me a
link to that form.
Once
we have a specific quote from you, what other steps would we need
to take before we can factor our first invoice? About how long would
you expect these other steps to take?
If
I were interested in following up with you, what number should I
call, and who should I ask for? Also, please clarify if it would
be helpful for me to fill out an online application prior to (or
instead of) calling.
Once
again, I'd like to request that you just email me your response,
rather than calling me. I will contact you if I have further interest.
Thank you very much for your time.
END
OF FACTORING COMPANY QUESTIONNAIRE
We
hope you find the above questionnaire helpful. Please let us know
if it was helpful to you. Also, please let us know how to improve
it. Just
email us with your comments.
Naturally,
the factoring company questionnaire above asks about many aspects
of account receivable factoring. To understand what you should expect
in terms of responses to the questionnaire (and how to interpret
them), please click on any of the links below:
How
does invoice factoring work? What is the process, and what
will my customers experience?
How
expensive is account receivable factoring?, and what other
terms should I pay close attention to?
How
do I know if I'll qualify for a factoring service? How do
I avoid spending a lot of time on this only to find out that nobody
will help me?
"Remember
that our site uses much of the industry terminology interchangeably.
Words such as Factoring
Companies, Invoice
Factoring, Factoring
Service all
reference the topic of this site, and you can click on any of those
phrases to go to the home page of our site."
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