Commercial factoring is a financial transaction in which a service provider known as the factor purchases the accounts receivable of a client and provides an advance payment on the face value of those receivable invoices. Services of this type allow companies to make use of their revenue stream now, rather than waiting for customers to remit payments. When attempting to determine which commercial factoring service to work with, there are several key areas to address: the amount of the up-front advancement, the procedure clients must use to remit payments on the invoices, the percentage of the receivables' face value that is kept as payment for the service, and the collection policies of the factor.
Most commercial factoring services will advance somewhere between 80% and 90% of the total face value of the invoices involved. The remaining balance is withheld until payments are remitted on all invoices in the batch, then a small percentage, usually between four and eight percent, is kept as the factoring fees for providing the service. At that point, the remaining balance is forwarded to the company. When talking with potential factoring partners, verify the amount of the advance and the amount of the fee, so you know how much of the total value of the invoice batches will eventually come to your company.
Along with establishing when and how much money the commercial factoring partner will provide throughout the process, it is also important to consider what your customers must do in order to remit payments on the purchased invoices. Most factoring services establish a post office box that must be included as the remit to address on the invoices. Typically, the remittance address will feature your company name, followed by the address assigned by the factor. To your clients, this simply appears as if your company is now receiving payments at a lockbox, and usually causes little concern. Before signing anything, make sure you know if the factor’s company name must be included in that remittance address, or if that address can be branded with just your company name.
Collection policies and procedures are also very important when evaluating any commercial factoring service. Ask to see copies of collection letters that would go out to any customer who failed to pay at the 30, 60, and 90 day marks. Also ask to see the guidelines that their collection agents use when emailing or telephoning your past due clients. While many factoring services work with their clients when customers are slow to pay, others use strategies that put the delinquent client on the defensive and damage your relationship with that client in the process. If there is anything about the factor’s collection procedures that causes concern, seriously consider doing business with another provider, even if it means settling for a smaller advance payment on the front end.
Even when you think the ideal commercial factoring partner has been identified, take the time to check references. While no service of this type will be free of some negative feedback, pay close attention to how quickly customer issues were resolved to the satisfaction of all parties concerned. This will tell a great deal about the attitude the factor exhibits toward customers, and how much they truly value your business.
