With the commercial finance market crowded with factoring companies, it can be difficult to find the best cash flow financing company for your firm. This article breaks that tough process down into five easy steps.
1. Be honest
When thinking about your company, be honest with yourself, and when speaking with commercial finance companies be honest with them. Not being honest only hurts your search for the best factoring companies. If you have something negative in your background, get it on the table right away.
2. The right fit -- all factoring companies are a little different
Spend a few minutes and write down the key characteristics of your company. This is important because each factoring firm has a different focus. Being able to summarize your firm quickly helps determine in a simple conversation which factoring company is the right fit for you.
The following is a list of questions you should be prepared to answer or present to possible factoring companies:
-
Describe your company in one sentence.
-
What is your current monthly sales volume and do you expect it change over the next year?
-
Who are your top five customers, and how much business do you do with them every month? How will that change over the next year?
-
How do the mechanics of your billing and collection cycle work? When do you bill your customers? What terms do you offer? Do you have any problem customers? On average, how long does it take your customers to pay?
-
Overall, what is the average dilution of your receivable portfolio? (Dilution is the difference between what you bill and what you collect. A simple example is if you bill $50,000 in invoices every month how much of that do you ultimately collect? If you collect $45,000 of the $50,000, then the $5,000 that you didn’t collect is categorized as dilution. In this example $5,000 is 10% of $50,000, so dilution is 10%.)
-
How is your personal credit?
3. Ask the same questions
When speaking with commercial finance companies, it is important that you ask them all the same questions, and that you keep track of their answers to make apples-to-apples comparisons. The following is a list of a few specific questions to ask after you have given them the summary of your company:
-
Based on what I have told you about my company, how much will you charge?
-
Are there any charges you haven’t told me about?
-
How long will it take to get my first funding from my initial application?
-
How long are the typical contracts?
-
How much will you advance against my invoices?
-
When will I receive the proceeds from my collections?
It is important to understand how the mechanics of the relationship work. Our firm built our own online system to eliminate all the paper from the process, but this is not the norm.
How are invoices sent to the factoring company? What is required for backup documentation? Is their system online? Does anything need to be mailed? How is account activity monitored?
5. Check the references
You’re about to enter a close working relationship, and you want to pick the best factoring company. So, do as much research as possible. Make sure to ask each company for references from companies similar to yours. When you call the references, ask all the same questions you asked the factoring company and make sure to investigate any discrepancies you find.
By following these simple guidelines you should be well on your way to finding the best factoring company for your firm.
Learn more about factoring and Fast A/R Funding’s services by downloading our informative “Factoring 101” guide, or call 888.833.2286 to speak with one of our small business finance consultants.
