Business factoring is an effective financial tool that can help companies through a rough financial period. The process usually involves selling batches of invoices or purchase orders to a factoring service, who then advances a large percentage of the face value of the purchased documents. As the service receives payments on the documents, most of the additional face value is remitted to the client, with only a small percentage kept as the fees for services rendered. Unfortunately, not all factoring companies operate in exactly the same manner, making it necessary for prospective customers to look closely at the terms and conditions of the contracts, how each service interacts with the client’s customer base, and what is involved in terminating the business relationship.
In the world of business factoring, companies providing this type of financial service earn money by assessing what is known as factoring fees. This is simply the amount of returns they receive for their services. Most use a simple strategy that involves keeping a flat percentage of the payments remitted by the client’s customers as they tender payments for the invoices purchased by the service. There are a few that also assess a flat fee in addition to this percentage or charge other fees for providing different services such as collecting on a past due invoice or providing the client with online access to the details of his or her account. Before signing anything, look closely at the schedule of charges and determine how much using a factoring service will actually cost for each business month.
Another important consideration in business factoring is how the service will interact with the client’s customer base. Most services require that the customers remit payments directly rather than the client forwarding those payments. In the event that a customer is slow in paying one of the purchased invoices, the factoring service will typically make attempts to collect that amount. While most attempt to avoid verbiage in print and oral communications that is somewhat threatening to the delinquent customers, others may use methods that damage the relationship with that customer. Before committing to any business factoring company, look closely at their collections process, including any opportunities for your business to assist in the collection effort.
One major factor to consider when evaluating a business factoring service is what is required to terminate the relationship once the client no longer requires the advance factoring. In some instances, the client must simply pay any remaining balance due on the account and cease submitting invoices for factoring. At that point, the account is considered settled in full. Other factoring services charge what is known as a termination or settlement fee in addition to settling any balance outstanding. That flat fee may be significant and serve as a deterrent to ending the relationship. Always determine what type of fees and charges apply in order to end the relationship before signing up with any factoring service, and you will avoid a great deal of expense and frustration when and if you no longer need the service.
