How to Pick the Best Factoring Company
Are you a carrier? Are you tired of not getting paid quickly on loads you deliver? A factoring company might be the right solution for you!
Invoice factoring is a business solution that both small businesses and large, established companies use to get improve their cash flow. Basically, you sign up with a factoring company and sell your accounts receivables, or invoices, to the company. The factoring company typically charges a small fee to take over the collections part of the process. You get paid on that invoice, minus that fee. If you need more information on the process, read our blog! [This will link to new What is Factoring and How Does it Work? blog]
Let’s discuss the best tips and important things to look for when choosing a factoring company and goin through their contract or agreement.
1. Recourse factoring: If there is a problem with an invoice, you are responsible for it. If an invoice isn’t fully paid by your client, the factoring company can make you pay the difference. If your client goes bankrupt, you are responsible for paying the factor. You pay a lower factoring fee because you take the risk of brokers not paying. Read more.
2. Non-recourse factoring: You are not liable to collect missed payments from your clients. If your customer goes bankrupt, the factoring company loses the money, not you. You pay a higher factoring fee because you don’t take on the risk of brokers not paying. Read more. InstaPay’s factoring agreements are non-recourse.
3. Hidden Fees: You could be charged for multiple things other than the typical factoring fee. Look out for these fees: sign-up, application, termination, incorrect paperwork, ACH transfer, minimum volume, reserves, credit checks, and same-day funding. Check out this blog to learn more. InstaPay will only charge a 3% flat factoring fee. You’ll never pay us for anything else!
4. Termination/Duration Clause: Some factoring companies require you to factor with them for a specific amount of time. Be sure to read over how many months your agreement is for. Most companies have a 90-day minimum and many go up to a 1-year lockup. Some companies also charge a termination fee if you quit factoring with them before the time period is over. InstaPay has no required length of time you have to factor with us and you can stop factoring with us whenever you want for any reason.
5. Minimum Volumes: Some companies require that clients factor a specific number of invoices within a specific time period. For example, a factor may require you to factor 10 invoices a month with them. If you don’t meet that volume, you could be charged an extra fee or your factoring fee will go up by some percentage. InstaPay lets you send in whichever invoices you want to - you don’t have to factor every load with us, but we will factor your first load for free!
6. Collateral/UCC: Be sure to check if your factoring company will file a UCC on your company. A UCC filing is not a threat to your business, and it does not affect your credit score. It is simply a financial document that states the factoring company has a right to some of your business asset(s) if you go bankrupt and owe them money. Read more.
7. Reserves: Factors may charge reserve rates as an insurance in case a broker fails to pay them. This means a percentage of your invoice amount is kept “on hold” for about 30 days or until a broker pays the factor. Be sure to see if your agreement requires you to have a reserve. InstaPay does not hold reserves and will advance you the full amount of the invoice, minus a 3% factoring fee. Read more.
8. Customer Limit: You may have a credit line of about $150,000, but that does not mean you can spend that all on one customer. You might have an individual customer limit of $25,000. That means you can spend a maximum of $25,000 on 6 customers each.
These are some important things to look out for in your search for a factoring partner. Some companies can be very complicated and you don’t realize what you signed up for until much later!
Still not convinced? We truly have the best offer available - a flat fee that never increases, no commitment, and absolutely no hidden fees. Read why our carriers love us and give us a call if you have any questions at 855-777-2242.