Authored by Phil Cohen
Even when you feel you’ve found the right factoring company for your situation, it’s critical to negotiate terms. The wrong terms can block your company from being its best, most agile self – while the right terms will make boosting your cash flow easy and pave a path for business growth.
Here’s our step-by-step guide to negotiating terms with an invoice factoring company in 2024 and what you need to know to reach a favorable deal for your business.
1. Understand the Basics
Preparation is key to successful negotiations. Before you begin, make sure you’re clear on how factoring works: you’re selling your accounts receivable to a third party – the factoring company – in exchange for immediate cash. The factoring company charges a fee for this service, and then they follow up with your customers for payment. Your goal is to minimize your fees and maximize flexibility.
Some of the terms you might negotiate include:
- The advance rate, or how much of the invoice you’ll receive up front. You can typically factor up to 90% of the invoice value up front and receive the rest later, minus the factoring fee.
- The factoring fee is what the factoring company charges you for their services. This will vary depending on the industry, the volume of invoices, the advance rate you choose, and the factoring company itself. Of course, the lower the fees, the more of your invoice value you’ll keep.
- The contract length is how long your agreement with the factoring company will last. More flexibility is usually better.
2. Focus on Hidden Fees
The best factoring companies will be transparent about fees. However, with some factoring companies, you may need to press them to reveal hidden fees or extra costs. Ask whether they have minimum volume requirements, or early termination fees. Costs like these reduce your flexibility and may hold you back if your needs change in the future.
3. Recourse vs. Non-Recourse Factoring
In factoring, there’s recourse and non-recourse options. Recourse factoring means you are still liable if your customer doesn’t pay. In non-recourse factoring, the factoring company takes on that risk. Non-recourse factoring may require higher fees and stronger credit, so make sure everything is spelled out to your satisfaction if you go that route. You might go with recourse factoring to take advantage of lower rates if your client base is reliable. (A factoring broker like Factor Finders can help you navigate which option is best for your situation.)
5. Ask About Early Termination
What’s your exit strategy? Factoring your accounts receivable should be a flexible solution, not one that locks you in long-term contracts, even after your needs change. Negotiations should touch on early termination clauses and costs, so you know how you can exit the partnership if it doesn’t meet your expectations. If the factoring company wants severe penalties for early termination, push back until you’re comfortable with your ability to leave or renegotiate as needed.
6. Use Your Leverage
If you plan to factor a large volume of invoices, you have some leverage you may be able to lean on to get better terms. The factoring company might be willing to lower rates in exchange for a large volume of business, for example. That’s because what they may miss in rates they’ll make up for in volume. You may have other advantages as well; a factoring broker can help you identify them before you settle terms with the factoring company.
7. Speedy Responses Are a Must
Many aspects of your factoring relationship may be up for grabs, but swift communication should be non-negotiable – especially in 2024. Make sure to inquire about the factoring company’s average response and funding times; you deserve to partner with a company that’s responsive to your questions and concerns, and funding withing 24 to 48 hours is ideal. In today’s market, you don’t need to settle for slow responses (or slow funding).
The Bottom Line
Negotiating terms with a factoring company can seem like a hassle, but it’s really a critical aspect of getting the best deal for your business. Don’t feel like you need to accept the first agreement you encounter, and you can always go with another company if one isn’t meeting your needs.