Cash flow consultants know that factoring is a great way to ease their clients’ cash flow tensions. However, pairing a prospect with the wrong factoring company could be even more detrimental to your client’s cash flow. Not to mention, sending a prospect to the wrong funder could also damage the relationships you have with your client and the funder. In order to avoid such a catastrophe, it is extremely important for consultants and brokers to know how each of their funding partners’ factoring programs work so they can match their clients with the most appropriate one. The best way to get to know your funders is to ask the following four questions…
1. What is your focus?
In general, factors can be divided into three different operating categories. First, there are large factors that operate nationally and are able to fund clients across numerous different industries. On the other hand, there are some factors that focus their operations in one specific geographic region. These smaller local factors have a home field advantage because their clients like knowing that their factor is literally right around the corner. The last category is comprised of factors that concentrate their funding in one specific niche. These factors’ clients appreciate the fact that their funder understands their specific industry.
Asking this question first will quickly help you be able to narrow down a huge list of factors to a more manageable handful
2. What fees do you charge in addition to your factoring fee?
After dividing your funding sources by type, the next obvious question to ask them about their factoring program is: “How much does it cost to factor with your company?” Keep in mind that factoring firms structure their fees in a variety of different ways, so this one question can easily turn into a string of multiple ones.
When a factoring firm advances money on receivables, it is actually making a legal purchase of the invoices at a discounted rate. This discounted rate can be a one-time flat fee, or it can vary depending on how long the factor owns the invoice. Discount fees can be affected by a number of things: the contractual commitment, the average monthly purchase volumes, the average size of the invoices sold, the number of account debtors (customers) that will be factored, the credit quality of those debtors, etc. Variations in each of these will lead to substantial changes within the fee structure.
There are plenty of other fees that a factor could tack on for additional services, such as charging for credit and background checks, compiling and shipping legal documentation and filing liens. Other factors will add administrative fees for postage, long-distance phone calls, or computer time. There are also fees associated with funding procedures, identifying set prices for a same-day wire or an overnight transfer of funds. “Penalty fees”, such as fees for misdirected payments, aged invoices or early contract terminations, constitute another class of charges that cash flow consultants should understand for each of their funders.
The more you understand about each factor’s fee structure, the more you will be able to answer when your clients have specific questions about them.
3. How do you determine your advance rate?
In addition to fees, it is important to consider your factoring partners’ advance rates, or the amount of money that a factor provides up front upon purchasing invoices. Of course this rate can vary, and oftentimes factors determine their advance rates on a client-by-client basis.
However, one norm to keep in mind is that quick payments and payments that are made in full will increase the chances of having a higher advance rate. In addition, some factors will increase the advance rate over time as a business grows and the factoring relationship solidifies.
Knowing how each of your funders calculates their advance rates will help you better be able to explain to your clients why they may have been offered a lower or higher one.
4. What are the specifics of your factoring contract?
As in any legal business relationship, factoring companies require a signed contract prior to moving money. An important point to understand is whether or not the factor requires its clients to meet monthly minimums/maximums. Penalty fees can be assigned if a minimum value of invoices is not factored within a month’s time. On the other hand, a company that is growing rapidly and has large volumes of invoices would have to be mindful of a factor’s maximum amount.
Another significant clause in the contract defines the required length of time of the factoring relationship. Some factors allow their clients the flexibility to choose how long they want to factor, while others will require a term-contract for 12-24 months and may also charge an early termination fee.
Also included in the contract are details on the type of guaranty that the factor will require before funding invoices. Although there are a few factors that do not require a guaranty, the majority of them will want either a personal guaranty, whereby the seller is personally responsible for any unpaid invoices; or a validity guaranty, in which the seller guarantees that all the invoices that are sold to the factor were prepared after services were rendered and the customer has agreed to pay them.
In its entirety, this article has addressed multiple ways to help cash flow consultants get to know their funders better. Of course, there are additional areas to research when examining various factoring companies’ funding services that are beyond the scope of this article. Just remember that there are thousands of factors out there, each offering their own unique program. It’s extremely important to look at the all-encompassing package of what each factor has to offer before making the referral.