Last Updated: February 08, 2023
How to Pick the Best Invoice Factoring Service: Factoring Company Shopping Guide
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You've done your research and determined that invoice factoring is the right solution for your business. Your next step is picking the right factoring company. Of course, as with most industries, you have an amazing number of companies from which to choose. What's worse, they all claim to be the best, or to offer the lowest rates or the quickest payment. They can't all be telling the truth.
You may be in a hurry to get started, but don't rush into anything. Your goal should be finding the factoring company that offers personalized service and employs best practices that reduce its own risk so that it can offer you competitive rates.
What to Look for in Invoice Factoring Services
Although the basic service provided by factoring companies is fairly simple to understand, comparing the details that differentiate one organization from another is a bit more challenging. To help you get started, we recommend answering the following questions to help make your decision.
Do They Provide Excellent Service?
Most companies claim to offer the best service. The only way to really tell is to talk to other customers and look at reviews online.
How Long Have They Been in Business?
Not every company can be judged by its time in business, but the best factoring companies tend to have been in business for at least 10 years. They've weathered the ups and downs of the economy and have developed solid business practices.
How Do They Fund Your Payments?
The whole reason you're using a factoring company is to get your invoices paid more quickly, so you need to make sure the company has ample funds to cover your payments. This is particularly important during a recession and other lean economic times. The factor should have a decent line of credit with its bank and possibly private funding as well.
What Factoring Type Does the Company Offer?
Though there are more than two factoring types, the main differentiator is between recourse and non-recourse factoring. Some companies offer both, so look carefully at the fine print. Recourse factoring places the responsibility for non-payment by your customer on you. With non-recourse factoring, the factor takes on that responsibility.
Does the Factoring Company Specialize in a Particular Industry?
While most factoring companies work with multiple industries, you often find the best service with a factor that specializes. To determine their knowledge of your industry, ask your sales rep industry-specific questions. Once you complete an application and request a proposal, you should also ask for client references. Let them know you prefer to talk to other clients in your industry.
Are Their Fees Competitive?
Fees are based on three main items: the volume you plan to factor, your clients' creditworthiness, and the amount of your invoices. Rates typically range between 1.5 and 3.5 percent every 30 days, with the lower rate being the term for 30 days or less. Many factors charge additional fees, particularly if they advertise very cheap rates, so look carefully for undisclosed costs.
How Does Their Advance Rate Compare to Other Factors in Your Industry?
Although the most common advance rate hovers around the 80 percent mark, they range from 70 to 95 percent. The industry with the lowest rate tends to be construction, as risk of nonpayment is higher there. Transportation and staffing industries typically receive the highest rates, in the 90 to 95 percent range.
Is There a Factoring Minimum?
A factoring minimum is the amount the factor expects you to bill in a single period, such as monthly or quarterly. If the factor has a minimum and you don't meet that period's requirement, you must pay the difference. Don't automatically discount a factor that charges a minimum, since it allows you negotiate a lower rate, just make sure you set a minimum you feel comfortable exceeding every period.
How Long Does it Take to Set Up an Account?
Standard account setup takes around three to five business days, with larger accounts taking longer. Unless your financial needs are acute, this question carries less weight than the others, but it might be a deciding factor if you have difficulty deciding between two factors.
Comparing Three Factoring Companies
To give you an idea of what to expect and the differences you'll see when you begin comparing services, we look at three factoring companies.
If your customers pay their bills quickly (within 15 to 29 days) and you process over $100,000 per month, you may want to consider altLINE, as they offer an extremely low 0.5 percent for fast paying clients. If you plan to factor $300,000 or more, you may get even more aggressive rates. The company also includes you in any customer communications, and expects it clients (you) to inform customers that altLINE now conducts billing. They only reach out to your customers at your request or to collect payment on an overdue invoice.
For a truly paperless solution, BlueVine is a popular choice that offers speedy payments courtesy of its 100 percent online operation. Payment occurs day-one for invoices due in 15 to 90 days. Your first advance receives approval typically within 24 hours, with subsequent advances occurring within minutes.
Payment of 85 percent of the invoice amount occurs within 24 hours, and fees equal 1 percent per week. Your credit line dictates advance amounts, which ranges from $5,000 to $50,000. The company does not fund past due invoices and it leaves control of collections and communications with you, the client. Specialty industries include marketing and PR, staffing, manufacturing, IT, and wholesale/distribution.
BlueVine's loan amounts range from $20,000 to $500,000, and fees start at 0.4 percent and max out at 1 percent.
Paragon Financial has a monthly minimum of $30,000 but it doesn't require you to factor all of a customer's invoices, nor does it make you deposit all of your payments into a single account. Its fees for accounts dating 60 days or longer are higher, and it also has hidden fees that it only shares once you complete the approval process. These fees vary according by client.
Take your time to thoroughly research factoring companies before signing on with one. Look carefully at hidden fees, how fees are calculated (daily, weekly, monthly), and how invoices are paid. Don't be afraid to ask for references, and the follow up with those references, particularly any from your industry.
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