Factoring and Choosing the Right Invoice Finance Lender

Factoring finance is a method of raising working capital by companies that trade with other businesses and offer credit terms. Goods or services should already have been delivered to allow the sale of invoices to a factoring lender. If you prefer to retain control of your sales ledger then provided your business is established and profitable then invoice discounting is the alternative to factoring.

Avoid unexpected costs and problems by performing proper due diligence on any factoring lenders offer.

Check out the factoring lenders customer care policy!

Once your trade debts are sold it is the factoring lenders responsibilty to collect the debt. If there are any payment problems it will be the factor who contacts your customer so it should be a priority to check how and when the lender will make contact. Make sure you have read the standard letters that will be sent as any heavy handedness either written or verbal could result in a lost customer!

Searching the internet and asking at local networking events should reveal if there could be potential "customer care" problems.

Find out all the costs of factoring!

The basic cost of factoring will include a service fee (watch out for minimum fees), interest charged on any outstanding amount plus an additional fee where the non-recourse option (insurance against bad debts) is taken. Make sure you find out any other potential factoring charges, for instance where a debt is paid late, renewal or termination fees.

Read all the factoring lenders terms and conditions!

The first and most obvious point is to check what proportion of any factored invoice will be paid up front. Will the invoice factoring advance meet your needs? Check the minimum term of any factoring agreement and notice periods for termination. One reason for utilising factoring is to help your company grow, check whether new lower limits can be imposed and if so how much notice you will receive, as any changes to the facility credit limit could have a major impact on your business!

What would the cost be if poor customer care by a factoring lender lost you your biggest customer! So take time with your selection process and avoid the potential pitfalls! Alternatively, establish a relationship with a commercial finance broker as a good one will know which factoring lender will treat your customers well.