You’ve determined you’re going to use accounts receivable finance to unlock cash available in a business invoice or pool of invoices. So now, how do you ensure you choose the right factoring program for your company? Here are three simple steps to remove much of the hassle associated with making the wrong choice and going with the wrong firm.

1) Survey various factoring companies to find the best factoring program:

• The key to doing a good survey is coming up with the right set of questions. Do you have a friend who uses a factoring firm? Ask them for a top ten list of questions they think would be helpful to you. If you don’t, read on for some insight:

1)  Long-term contracts?
2)  Requirement to factor all invoices, or just a subset of customers is OK?
3)  Minimum factored volume or minimum client revenue requirements?
4)  Application fee?
5)  Other closing costs/fees?
6)  Full notification or non notification of customers?
7)  Client web portal and reporting capabilities?
8)  Need for paper invoices or fax/email/paperless?
9)  How are factoring fees charged?
10) Guarantees required by owners of business?

• Ask for a demo of the system used by the factoring firm and see if it provides transparency

• See how long the application process takes. In today’s business world, nimble factoring companies should be able to deliver you an approval and even get you funded in four to five business days.

2) Check several references -- This seems like an obvious step, but most people just overlook it during their due diligence process. You want to borrow some or all of your survey questions and use them again when you talk to references. Ask a factoring company to provide you with at least three references: one firm in a similar line of business as yours, one firm in a totally different business line/industry and one firm that no longer is factoring with the firm. You’ll be surprised by how much you learn from another business owner that operates a very different business from yours. For the firm no longer factoring, this could be a former client of the firm, which is good because former clients often give you different insight than current clients. Finally, you should consider organizing your data collection efforts in an organized manner so you can easily compare the results you are getting. We’ve used an excel spreadsheet to gather this information in the past and that seems to work well.

3) “Try before you buy!” -- This is a great option if the factoring company you choose to start with has 1) no application fees, 2) no long-term contracts, 3) the ability to factor just a few customers and not all of your customers, and 4) no minimum volumes. Many people do not want to take the time to put an entire factoring program in place to then move it to another firm. However, if you got good answers to the 4 points mentioned above, and you are able to get started with a firm in a matter of a week or so, don’t be paralyzed by overanalyzing a factoring firm. Sign up with one that appears reputable and checks out after you’ve performed steps 1 and 2 above. Start factoring a few of your customers for a couple of months and see how well the relationship is working. If it’s working well, continue to add new customers to the group you are factoring. If you don’t like what you see, pull out the survey you have and choose another firm that seems to have what you need. 

Sifting through the various factoring companies you see on the internet is time consuming. Start by picking a few to evaluate and add more to the process if or when a firm drops out because you’re not getting a good feeling when you’re collecting the responses. In the end, you’ll be working with the people at the firm, so you want to be sure you like how they handle the inquisition you’ll be putting them through. Most firms are going to be happy you’re a prospective client who wants to be educated. Educated clients are the best clients to have, because there is less chance for misunderstanding down the road.

Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Schedule a consultation below, or call 888.833.2286 to speak with one of our small business finance consultants.