On establishing that invoice factoring or invoice discounting is appropriate for your business, it is useful to know what you should expect from an invoice factoring company and what to look out for.
What are they actually offering you?
You need to consider what specific services the factoring company can provide and be sure that they are appropriate for your needs. It sounds obvious, but you need to ask, especially with regards to funding flexibility. For example, the factoring facility may have limits on the amount of finance available other than the 80% prepayment facility.
Ask them about:
Recourse Period; the factor will not approve invoices over (normally) 90 days old.
Funding Limits: the factor will have a limit of how much it is prepared to advance against each customer.
Concentration limit; This is set as a percentage of the whole ledger (normally around 25%) and means that the factor may restrict any customer balances that exceed 25% of the total ledger.
It may be that certain factors will run the account strictly to the rules and may restrict the facility funding unnecessarily.
Charges quoted for factoring can vary widely and can be dressed up in various ways to look more attractive. There are two main charges for a factoring facility. The service fee which is charged as a percentage of the invoice value (normally 0.5% to 3%) and the discount charge, which is an interest charge over bank base rate – charged in much the same way as interest on an overdraft. Additional charges may apply to exceptional items or additional work, but some factors charge them as a matter of course. Also remember that as your sales grow your charges will grow. You should be in constant negotiation with your factoring company to reduce their percentage factoring fee or better still ask for a fixed fee! A reputable factoring company may not always be the cheapest, but should offer the best value for money and be open to ongoing reviews and discussions about charges.
Your factoring company will be contacting your clients and chasing for payment. It is therefore essential that you have confidence in the company as a whole and in the individuals who will be dealing with your customers. Find out more about the factoring company you are proposing to use. Are they backed by major organisations such as banks or well-known brands? Do they have large numbers of existing clients? Are they members of industry associations? Everyone says they provide a good service but you need to dig a bit deeper than surface testimonials. You could request to speak to existing clients or they may be able to provide you with independent feedback confirming what their clients think of the service.