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Factoring companies are great ways to make use of the funds in your accounts receivable now rather than waiting for customers to remit payments. While a service of this type can be helpful when you need cash now rather than later, it is important to remember that not all companies of this type operate in exactly the same way. For this reason, potential clients should evaluate each factoring company they consider based on the amount of fees charged, the terms and conditions of the factoring contracts, the method of delivering funds, and how factoring company personnel will interact with your customers.
Understanding the terms and provisions with the factoring agreement is essential when evaluating the potential with a given factoring company. While the focus is often on the charges and how the funds are disbursed to the client, look beyond those issues and consider the other components of the contract. This includes understanding what happens when your company decides to end the working agreement, as well as how collections on unpaid invoices are handled. You will also want to know how remittance of payment on factored invoices are handled, and if that process involves changing the billing address on your customer invoices. Knowing exactly what to expect is important before making a commitment that looks good on the surface but could lead to undesirable situations later on.
When it comes to the factoring fees charged by a given factoring company, chances are those fees will be in the form of a percentage of the total value of the invoice batch that is processed. Typically, this is somewhere between four and six percent. Keep in mind there may be additional fees, including charges for online account access, or return fees when an invoice is not paid according to terms. Evaluate the fee schedule thoroughly before choosing to sign with any factoring company.
The impact of working with a factoring company on customer relations is also a major consideration. In some cases, the matter is handled very discreetly, with your clients never knowing you are using a factoring service. In other situations, the structure of the relationship calls for the clientele to be made aware of the move, sometimes because of the change in the remittance address or the insistence that the name of the factoring company be included in that remittance address. In addition, many factoring services prefer to manage their own collections efforts on past due invoices they’ve purchased. Get detailed information on those collection processes and make sure they are in line with your company philosophies before entering into any factoring agreement. Failure to do so could lead to awkward situations with clients who simply overlooked an invoice, and ultimately cost your company a great deal of business.