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Invoice Factoring Companies:
Decision Criteria for Selecting a
Factor, Part III |
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Invoice
Factoring Pitfall #11 – Reserve accounts are abused.
Reserve accounts are common to the factoring industry. They
serve as a security deposit to protect the invoice factoring
company against
short or no payment on invoices. Some factors hold a certain
percentage of each invoiced amount in their Special Reserve
Fund for just this purpose. However, since reserve funds are
really your money but under the invoice factoring company's control, they are
sometimes misused. Therefore, it’s important that you
understand how your intended factoring company handles your
reserve account.
Receivables Factoring Pitfall #7 above outlined the structure
of a cash flow factoring fee. The Reserve fund is the remaining part to
this discussion.
To review, let’s say the factor advances you 80% of your
invoiced amount immediately upon receiving your invoice. When
your customer pays your invoice, the factor places the
remaining 20% into your Special Reserve account. Once the
payments clear, the factor subtracts his fee and remits funds
to you that represent
the difference. At least that’s how it should work.
Sometimes, an invoice factoring company insists on maintaining a
permanent reserve account of 5 – 10 percent of your monthly
invoiced amounts. This procedure is good for the factor, but
not necessarily for you because: |
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The
better deal is to work with a factor that remits all of your reserve
funds upon invoice clearance less the agreed factoring fee.
We urge you to clarify with your prospective invoice factoring company: |
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Again, carefully read your proposed agreement to understand fully
how the reserve account is treated. This will tell you a great deal
about the business practices of the factoring company, and also
possibly save you much grief if the relationship proceeds.
Finally, you are better off working with a factoring company that
does not maintain a permanent reserve fund, but since each situation
varies, this is not a hard and fast rule.
Business
Financial Factoring Pitfall #12 – Inadequate reporting procedures
Since cash flow and knowing about it is the lifeblood of any
business, you would think that all factoring companies would be set
up to provide proper, easily understood reports on your accounts
receivable activities. However, this may not be the case.
Therefore, you really need to check out the accounts receivables factoring company’s
financial reporting procedures and processes to ensure that they
will work for you.
In any relationship with a receivables factoring company, you will benefit by
having ready access to current, easily understood, verifiable
financial reporting about your accounts receivable transactions.
This allows you to operate your business successfully, while
preserving your peace of mind.
Ideally, you want to have 24/7 access to your account information
and know that your reports are current all the time. In addition,
having a verifiable audit trail is also advantageous.
Invoice
Factoring Pitfall #13 – Not Understanding Your Agreement
As you can see from the above, the future of your business can hinge
on how well you understand the intent and language of the factoring
agreement you are considering entering. A bad agreement can lead to
an overly expensive or truly bad experience that could end up
costing you a great deal as outlined in the examples above.
Since factoring arrangements differ in their language and their
intent, you want to read your proposed contract very carefully and
seek clarity from your intended factor.
SUMMARY ACTION
LIST
Having read this far and worked the examples, you should now know
what pitfalls lurk out there in the factoring industry. To be sure,
ethical factoring companies do exist, ones who share your values and
ethics, and who see themselves as a valuable partner in the growth
of your business.
All you have to do is find one and then perform your due diligence.
As always with financial matters, it’s much better to do this before
you desperately need funds so you have a relationship already in
place that allows you to comfortably and confidently plan your
growth.
Apart from what is presented above, here are some useful guidelines: |
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1. |
Work with
an ethical factoring company that has a verifiable track
record. |
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2. |
Ask for
and check client references |
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3. |
When
talking to current or past clients, ask them, “Knowing what
you now know about company X, would you use them again to
factor your accounts receivables?” Then, listen carefully to
the response. |
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4. |
Have a
personal conversation with the people at the factoring company
who will administer your account, and have them confirm the
accuracy of the information from the sales staff. |
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5. |
Ensure
the factor’s reporting system operates in real-time via the
Internet to give you current information on your accounts
receivables, etc. |
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6. |
Ensure
that you fully understand how each fee is determined to avoid
being surprised by fee nibbling in the future. |
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7. |
Read the
language of your proposed agreement very carefully and seek
clarity on anything that you don’t understand. |
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8. |
Before
signing on the dotted line, be certain you really know the
deal you are getting with all of its ramifications. |
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9. |
Finally,
speak with the “good guys” of factoring – the two Gregs – Greg
Curley and Greg Porter at Capital Funding Solutions in Ft.
Lauderdale, FL. They are professionals, who take pride in
their pledge “Your Financing! Delivered quickly and
ethically”. |
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View and print our
Factoring Application Form:
 Click Here for Adobe pdf version:
Factoring
Application
Click Here for Microsoft Word
Version:
Factoring Application |
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Factoring
Informational News Articles
Selecting an
Invoice Factoring Company: Best Practices, Part I
Selecting an Invoice Factoring Company:
Best Practices, Part II
Selecting an Invoice Factoring Company: Best
Practices, Part III
View and print entire article pdf format (click below)
Invoice
Factoring - Best Practices for Selecting a Commercial
Factor
Supplier Guarantee Funding:
An alternative to Purchase Order Financing (PO Funding) that
offers more flexibility and less expensive funding to
businesses.
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