Factoring - What You Need to Know Before Applying For a Business Advance on Your Receivables

Business factoring is the sale of commercial accounts receivable invoices to a buyer, or factor, at a discount. The Factor generally assumes full responsibility for payment collection and credit losses on the new accounts. Factoring is a very useful tool for merchants - not only does it help businesses stay afloat, it helps them grow, despite the discount they must pay on their receivables. By simple laws of economics, if you have an already functioning business that generates profit, the more money you invest in it, the larger profit you make. Business factoring allows merchants to receive their profits immediately, without waiting 30-90 days, thereby freeing up their cash to re-invest in tools and materials, cover the payroll or pay off debt. Because business factoring is an advance on receivables, it's not debt so it does not affect the balance sheet.

The way your factoring company conducts business will have an enormous impact on the speed, quality and value of services you receive.

Watch out for those dangerous practices: most business factoring companies are simply middle men selling leads. They will send your application to literally hundreds of other companies, inundating you with useless spam and introducing you to lower grade companies you may not wish to do business with. The biggest risk of applying to multiple companies is that your business may end up with a lien on the receivables even before you receive a merchant loan, which will then make you ineligible for factoring. The way this works is that some factoring companies have inserted small print language into their applications allowing them to file a lien against your receivables as soon as you sign the application, which is before they advance any money to you. This makes you ineligible for applying to any other company. The best way is to avoid companies that file liens altogether. You can obtain a merchant loan without agreeing to a lien on your receivables.

You should also be aware that the cheapest rates do not translate into the best service. The factoring company you ultimately chose may at some point come in contact with your clients, especially for collection purposes, so you need to make sure that they are professional and will not alienate the clients you worked so hard to develop. Here are some key areas you need to research before you decide on a factoring company:

- Customer Service
- Verification process
- Collection practices
- Invoice ledgering and accounting
- Float days
- Invoice submissions
- Aging and other reports
- Account access

The factoring company you choose will provide actual management services to your business, including credit checks and screening, invoice and payment reporting, monthly statements for your customers and delinquent account collections. You want to make sure that you get the highest quality of those services to get your money's worth -- some companies, for example, provide ledgers that can be securely downloaded directly into your company's bookkeeping software thus reducing your accounting costs.