Authored by Phil Cohen
Factoring can be a lifesaver for your business when it comes to cash flow, allowing you to meet your obligations no matter when your customers pay. But choosing the wrong factoring company can cause you even more headaches than late-paying customers. While you can always use a factoring broker to make a beeline for the best factoring company for your needs, it’s also helpful to understand just what you should be watching out for.
Here are the top 6 red flags to be aware of when selecting a factoring company in today’s market:
1. Hidden Fees
One thing we’ve seen that should set off alarm bells is a lack of transparency regarding fees. If a factoring company tries to spring hidden fees and charges on you, or buries them beneath a mountain of fine print, you could be in for a nasty surprise. You deserve to see and understand all charges that apply with factoring, including invoice processing fees, any minimum volume requirements, and early termination fees. It’s far preferable to work with a factoring company that lists all costs upfront, so you know exactly what to expect.
2. Lack of Industry Experience
Different industries can have vastly different needs, and most factoring companies should recognize that. A factoring company that doesn’t have experience in your industry might not be aligned on what you need and how your industry works. That could cause problems when you’re not aligned on things like invoice amounts, payment schedules, and upfront costs. Healthcare staffing companies will have very different needs from trucking companies, for example. If you’re considering a factoring company and they’ve never worked with your industry before, ask yourself if you want your business to be the guinea pig.
3. Slow Funding
If you’re looking for a factoring company, you’re probably looking for quick access to cash. A factoring company that is dragging its feet to advance your funds isn’t going to help you stay competitive and could even hold you back. Especially with the economy as variable as it has been in 2024, slow funding could be a major stumbling block for your business. Focus instead on factoring companies that can move as swiftly as you need them to.
4. Inflexibility
Another benefit of factoring is that it should be flexible. Companies that require strict factoring of every invoice take away the flexibility you need to be able to pivot, adapt and grow. Stay away from factoring companies that don’t offer flexibility and customization. You’ll also want to avoid companies that want to lock you into long-term contracts with no way out. That defeats the purpose of factoring and seriously limits your options.
5. Poor Customer Service
Similarly, a factoring partner should respond quickly when you reach out and be willing to solve your problems or answer your questions right away. Just like slow funding is a red flag, so is slow or incomplete communication. It can hamper your ability to get things done or take advantage of opportunities. A good factoring solution will respond to you fast and stay communicative about your relationship.
6. Misleading Promises
Factoring is a solution, but it isn’t a cure-all. This is especially true when it comes to recourse vs. non-recourse factoring – both in terms of costs and in terms of liability. Recourse factoring offers more competitive rates, but you retain the liability if customers don’t pay. With non-recourse factoring, the risk shifts to the factoring company, who then charges higher rates to compensate. Be very wary of factoring companies that make non-recourse factoring promises that sound too good to be true.
The Bottom Line
When learning how to choose a factoring company, avoiding red flags is half the battle. Do your research when vetting factoring companies and avoid ones that overpromise and underdeliver. Above all, trust your gut. You deserve to partner with a company that has integrity, does what they say they’re going to do, and treats everyone with respect.
To streamline the process, rely on a trustworthy factoring broker that already has relationships with factoring companies in your industry. Contact Factor Finders to connect with the right factoring company for you.