How to choose the right factoring company

Waiting to get paid is one of the biggest frustrations for entrepreneurs, especially when payment terms stretch to 30, 60, or 90 days.

Delayed payments can seriously hurt a company's cash flow, causing entrepreneurs to fall behind on important expenses or forcing them to turn down new customers or growth opportunities.

Factoring can be a lifeline for your company by giving you faster access to cash. Instead of waiting weeks or months, small and medium-sized businesses can collect the value of their invoices before the agreed due date.

With funds on hand, entrepreneurs can keep their businesses moving, win new markets and customers, or invest in new projects.

1. What is factoring?

Factoring is a financial transaction in which a company sells the invoices it has to collect from its customers to an external financing institution, known as the factor.

After this transaction, the company collects payment for the services provided or goods delivered (within 24 hours, in the case of Instant Factoring), in exchange for a fixed fee charged on the invoice value and paid to the factor.

In most cases, micro-enterprises struggle to access financing, or cannot access it at all, from specialist institutions or banks. Even when they do manage to secure financing, the process is cumbersome, takes a lot of time (45 to 90 days), and uses resources that would be better invested in the company.

Factoring supports these companies by giving them a simpler and much faster way to accelerate cash flow through one-off invoice financing.

2. How do factoring companies work?

The first step in the factoring process is choosing a factoring company.

After you review the options on the market and choose the most advantageous provider, you can start the invoice financing process.

See point 4 below to learn what to look for when choosing a factoring company.

Here's what the full business process looks like:

1. The company delivers the goods or provides the services to the customer and issues an invoice with an agreed payment term;
2. The company uploads the issued invoice to the factor's online platform, creating the financing request;
3. The factor reviews the request, checks that the data is correct, and confirms that everything is in order with the invoice and the customer;
4. If the request is approved, the applicant is notified, and its customer is informed about the new account where payment should be made;
5. The applicant company receives the money in its account and uses it to continue its operations.

3. Advantages and disadvantages of factoring

Factoring services are designed to be an advantageous solution, especially for small businesses, but it's worth looking at every angle. Here are a few advantages and disadvantages of the service:

Advantages

Get cash faster. It's hard to keep your cash flow balanced until invoices are collected, especially when large customers ask for long payment terms. With factoring, you collect invoice money before the due date and can keep your business moving. See here how factoring helps you improve your cash flow.

It can improve your relationships with suppliers and customers, since you'll be able to offer your customers longer payment terms, while suppliers will be happy that you can pay them on time or even early.

Take advantage of growth opportunities. With access to cash, you'll feel much more comfortable taking on orders from larger customers.

You save time. With factoring services, the process is much faster than a bank loan, for example, and the big advantage is that everything happens online, even from your phone.

Make your business more resilient in a crisis. In times of economic uncertainty, the last thing you want for your business is to lose access to cash. Learn about other steps we recommend to strengthen your business's resilience.

Disadvantages

Compared with a bank loan or other financing solutions, the financing amount in factoring is strictly tied to the value of the invoice you need to collect. It's more of a short-term solution for accelerating cash flow, not extra funding for larger investments.

The factoring process involves contacting the customer to verify the details and inform them about the new bank account where they should send the money. Although the factor's involvement isn't intrusive at all and doesn't affect the customer's activity in any way, some people may be hesitant and may not understand how this service works. It's best to inform your customers and be transparent about this process to prevent misunderstandings.

4. Choosing the right factoring company for your business

As a small business owner, it's important to make sure you have working capital to keep your company running and cover any cash gaps. It's just as important to choose the right factoring provider when you need support.

We want to help you make an informed decision, so we've prepared 7 questions to keep in mind when choosing a factoring company:

4.1. What kind of services do they offer?

Before you choose, think about your business needs: do you want to sell all your invoices automatically, or only certain ones? Can you take on the risk of customer non-payment, or would you rather have the factor take that risk?

Here are the types of factoring:

Recourse factoring vs. non-recourse factoring

Recourse factoring: this is a form of factoring in which the risk of invoice non-payment or customer insolvency is borne by the company that requested the financing.

The factor takes responsibility for managing and financing the invoices, while retaining the right of recourse against the applicant company if the assigned receivables are not paid.

Non-recourse factoring: if the customer the invoice was issued to doesn't pay on time or doesn't pay at all, the factor handles collection without involving the applicant company.

As a result, the risk of insolvency or non-payment is transferred to the factor. Non-recourse factoring is more expensive and harder to obtain, and it is usually available only for larger, lower-risk customers, because the risk of non-collection is fully transferred to the factor.

Factoring versus invoice discounting

Factoring: in this option, the entire business relationship with a specific customer is usually assigned, and the receivables are purchased by the factoring company. Instant Factoring offers a unique service that also lets you assign individual invoices, for one-off financing whenever you need it.

Invoice discounting: a form of short-term financing that lets a company get credit against unpaid invoices and receivables. The company using the service pays a fee charged on the total invoice value.

In both cases, the advance is usually 70% to 90%, but Instant Factoring provides financing for 100% of the invoice value, minus the fee charged.

4.2. Which industries are accepted for factoring services?

In general, companies that work with major customers, have a transparent financial history, and don't present risks are good candidates for any factoring company. The services offered by Instant Factoring are available to any company, regardless of size, geographic location, or industry.

In 2020, most Instant Factoring customers came from the following industries:

• Transport
• Construction
• Retail and distribution
• Business services
• Manufacturing
• Metallurgy
• IT

4.3. Are there hidden costs or fees?

Some factoring companies have hidden fees or penalties. Find out when penalties apply so you can avoid them.

Minimum monthly fee: some factoring companies require a minimum number of invoices or a minimum cumulative value each month. If you don't meet this requirement, an additional fee is charged.

Assessment fee: this is charged every time the factor needs to verify the eligibility of one of your customers.

Additional collection fees: some companies offering traditional factoring may charge a success fee for recovering a receivable, which can be as high as 10% of the invoice value.

Instant Factoring offers an innovative business model with one transparent price and no hidden costs, with all expenses included in the financing fee (assessment costs, receivables collection costs, interest, administration costs, etc.). This way, you'll know the exact cost from the start and eliminate the risk of unpleasant surprises.

4.4. What does the factoring contract include?

There is no mandatory factoring contract format for it to be valid. Factoring companies can create their own contract template with the specific terms of the service.

Typically, a factoring contract includes the parties involved: the seller (the supplier of goods or services), the factor (the company providing the financing), and the assigned debtor (the customer who was invoiced), with the note that the latter is mentioned only as the debtor and is not a party to the contract.

The contract covers the assignment of the seller's receivables to the factor and states that they must be clearly established, quantified, and not yet due. It also sets out the parties' rights and obligations, depending on the factoring company and the financing option chosen.

Instant Factoring gives you maximum flexibility, with a separate contract signed electronically, directly online, for each invoice, so you don't take on long-term obligations. Of course, if you want a long-term partnership, you can also sign a standard long-term contract.

4.5. What fee do they charge, and how much advance do you get?

If you choose to sell your invoices to a factoring company, you'll usually receive an advance of 70% to 90% of the total invoice value.

Find out the exact percentage so you can see whether it helps in your business situation. Instant Factoring transfers the full invoice value from the start, 100%, and deducts only the factoring fee.

As for the fee, it's calculated based on the time left until the invoice due date. For example, Instant Factoring charges an average fee of up to 0.10% per day, depending on your financial rating and your customer's financial rating.

So in most cases, the fee will be 1.5% for 15 days until the due date, 3% for 30 days, and so on.

4.6. How quickly can you get the money?

Depending on the factoring company you choose, the process can take weeks or even months. Choose a company that uses advanced, fully digital technology to transfer your money as quickly as possible, especially if you're short on time and need cash urgently.

With automation, on the Instant Factoring platform it takes 3 to 4 minutes to create your account, two hours to receive approval for your financing request, and 24 hours to get the money in your account.

4.7. Do they offer quality service?

Whether you choose a traditional factoring provider or an online one, make sure you have access to customer support and can count on a fast response when you need it.

If you have questions about the service terms or special requests, it's best to speak with a company representative first to make sure you're fully informed.

Because we know how important it is to move fast in this economic climate, Instant Factoring offers its customers real-time support from its financing experts.

5. Find out whether you're a good candidate for factoring

Think through all the questions above and check whether the offer from your chosen factoring provider matches your business needs exactly. Look for the best mix of benefits, flexibility, and features, and don't settle for less.

Review the eligibility conditions specific to each factoring company to make sure your invoices will be accepted and you won't run into problems receiving your money.

6. Instant Factoring can help you

Instant Factoring supports SMEs, start-ups, sole traders (PFA), and micro-enterprises with fast, simple financing solutions. Long payment terms can create major challenges, so our factoring services help entrepreneurs cover cash gaps and manage business cash flow.

The whole factoring process happens online, and the steps are simple: you create an account with your company details, submit a financing request by uploading the invoice and completing the required information, attach the documents that prove delivery of the product or service to the customer, and then wait for approval. The final step is receiving the money in your account and continuing to run your business without financial constraints.

Disclaimer

The information above is provided for educational purposes only and does not constitute financial advice from Instant Factoring. For information about Instant Factoring products and services, please visit the FAQ page on our website.