7 Questions to Ask Before Signing a Factoring Agreement
There are many different types of factoring companies. There are also many methods of factoring. Different companies operate in different ways, and as a result, you need to do your homework to be certain you are working with the right company for your business. There are a number of questions here to help get you started so that you know what to expect when you sign the contract:
1. Do you have experience in our industry?
Where as Factoring companies generally factor a variety of industries, some specialize in specific industries, such as construction factoring, and that experience, first of all, lets them understand your business right from the start. This shortens the time required for you to receive your money. Secondly, they are better able to evaluate the risks associated with collections in that industry.
2. What does your application process involve, including fees and pricing?
Find out what is required, how long it will take, and how much it will cost. Inquire regarding additional fees and watch for them in the contract. These could be fees for due diligence, credit reporting, background search fees, and more.
3. What if the client does not pay the invoice? Who is responsible?
The answer to this is determined by whether you are doing non-recourse factoring or recourse factoring. In non-recourse factoring, the factor assumes all liability for the non-payment of the debt. Recourse factoring, which is generally less expensive, requires the client to be responsible for non-payment. This is usually a rare occurrence when working with a factoring company that has a good understanding of credit.
4. What type of support systems do you offer your clients?
Great factoring companies offer credit and collection functions as well as their products. Full service factoring companies provide back office accounting functions, making your accounts receivable a variable, rather than a fixed cost. The factor will collect the debt from the customer and provide a detailed account of payments collections with real time access to your information.
5.How do you determine the advance?
The advance is equal to the value of the invoice minus the reserve, minus the discount fee. The reserve is the holdback amount that is paid to the seller once the invoice is paid. The discount fee is the cost associated with the transaction as well as expenses incurred.
6. Is there a contract term? How long does this contract last? Is it automatically self-renewing?
Asking these questions in advance will ensure that you do not get locked into a contract that does not serve your needs and that you don’t incur any unexpected costs like termination fees.
7. Do you have other companies and contact names as references that I could call?
Like any other business decision, it is worth getting a reference on service levels and reputation before you sign.
These questions will help you find the right company to suit your needs. Check into the answers to these eight questions before you sign so that you know your obligations to the factoring company and so no surprises happen once the process is underway.