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Invoice Factoring Questions
Invoice Factoring is simple and yet it is complex … as complex as the factor wants to make it. Don’t be fooled: Many factors hide fees and position clients so that they can be manipulated into paying higher costs. Don’t get caught in this.
If you ask the right questions you’ll be ahead of the game. If something isn’t answered please: Call us and ask. Our reputation has been built on openness and integrity.
Keep in mind as you move forward: The proposal may say one thing and the contract is apt to seem like a whole new world but it is what lies within the contract that dictates what it will actually cost you in the end.
In preparing these questions we have provided you some basic comments and explanations for the questions we suggest you ask about invoice factoring to get you started … and most importantly before you sign any contracts!!! Feel free to scan the questions or read into our comments because we believe that the more you know, the more successful you’ll be both using factoring as well as keeping your costs down!
1.) Questions you should ask about factoring adds and pricing …
a.) Your ad offers the lowest price … what is this being compared to?
b.) Your ad says you offer factoring @ 1% or ½% … but the proposal reads differently … so what did this mean? (Careful here of a ‘bait and switch!)
c.) Get this one in writing: Explain to me all of the possible added fees and show me a complete and real time example that I can use as a template. Also: Will you guarantee that the fees in the example will be the fees if I actually factor with you … in writing?
The advertisement that you saw may be truthful in what it says: “We offer the lowest factoring fees” … however the ad may not tell you about line fees, line employment fees (what you pay when you take the money); days outstanding fees; and that you have to factor all invoices or all of the invoices from any customer you submit. Does it get worse? It may! Note: Possible fee pitfalls listed are some of the more obvious ones as this can go on and on.
Are there factors that offer “clean and defined” pricing? Yes. In fact these factors, sadly, lose business to the ‘lowest priced’ factors and yet their pricing actually ends up costing less.
Can factors manipulate payment receipts and other fees? Get this in writing. Does it make sense that the factoring services you’re looking for can be offered on the surface for not much more than a bank charges for a bank loan? This doesn’t make sense to me but if it does to you then we wish you the very best of luck!
Something to think about …
What if you have ten invoices from one customer but you only need to factor three of them but the factor (often referred to as a ‘structured’ price factor) requires you to factor all of the invoices from that client (or worse yet all of your invoices?) any time that you factor? A block priced factor charges you more with a 2.5% discount then the structured factor who only charges you a 1% discount but by the time you are through paying the invoice factoring fee with the structured price factor, you may very well end up paying far more than you would with the block priced factor even though the price looks to be two and half times higher. Don’t get caught!!!
Know too that a structured pricing relationship in some applications may be the most cost effective way to go but make sure you understand the whole picture … or less will really cost you more! Analyze when happens when this thing goes in motion and look at the following example:
On $10,000 in invoices with the Block Price factor’s discount it costs you $25 per $1000 of cash that you need, so if you only need $3,000 your total cost is $75.00.
On $10,000 in invoices with the Structured Price factor’s discount it costs you $100.00 because you have to factor all of your invoices even though you only needed $3,000 in working capital and the reality is that you paid a 3% discount right out of the gate and for no reason!
Ready for this? Now add in a line fee (1% of your approved facility); interest on the $3,000 (employment fee); and a few other fees and by the time you are done you are paying well over the 2.5% the block priced factor charges.
In fairness: Structured Pricing can be effective if you have to factor all of your invoices all the time, HOWEVER this is dangerous thing to do because if you have a problem invoice in your portfolio, this can cost you the game. Call or email us to discuss.
2.) Do all of my invoices have to go to you?
Find this out and find it out quickly. If you have to send all of your invoices to a factor and if you are being charged a fee on all of these factored invoices, their price of ½ % monthly looks low BUT if you only need to factor 10% of your invoices, you’re paying a lot of money for absolutely no reason.
Look to selective factoring for this. The price is higher BUT the cost is less overall far more often than not!
3.) Are you a Recourse, Non-Recourse, or Modified Recourse Factor?
What does this mean? If an invoice doesn’t pay OR is late paying can the factor go after your customer? Come after you? Come after both of you?
The best way? The factor works with you to put in place an agreement of how follow ups with slow or no pay clients are executed. Bar none: This is sensitive territory so be sure to confirm: Recourse, Non Recourse, or Modified Recourse … and one other thing: Get it in writing.
Recourse: This means that if an invoice doesn’t pay in time, the factor can drive their collection efforts toward the customer due to the invoice as well as the company that sold the invoice to the factor.
Non-Recourse This means that the factor can only drive their collection efforts toward the customer due to pay the invoice but not the seller of the invoice. Typically most factors that are non-recourse factors are aggressive with their collections. Of note: If the invoice is proven to be fraudulent or the product/service in fault, the factor does have the right to pursue the company that sold the invoice to make the invoice good.
Modified Recourse (what we provide mostly!) This is the best of all worlds in that the factor will work first with the company that sold the invoice to the factor to allow them to resolve a problem directly with their customer, so as to allow the customer relationship to be protected as best that it can be. Of Note: The factor does reserve the right that if this does not occur that the factor can drive collection efforts toward the customer paying on the invoice but normally prefer that the seller of the invoice act first. Please know too that many of our clients are confident enough with the professional approach that we employ to have us do their collection calls and free up their people to focus on sales and product quality!
4.) How does your guarantee work?
The purpose of a guarantee from the owner of a company that is using invoice factoring is to ensure that they will not defraud the factor and too that they will support the factor in the collection process … and vice versa.
Here is where it gets interesting: A non-recourse factor can tell you that once they buy your invoice that they own it, HOWEVER, if they cannot collect on the invoice and the invoice is proven to be a ‘bad invoice’ they have many options to recover their money one of which may be to force you to replace the invoice. NOTE: Until you do? They can hold up your future advances.
Don’t just discuss this: Get it in writing. Your cash flow depends on it!
5.) Can I hold my invoice and factor it later in the cycle of it’s life to minimize and control my fees?
Many factors, when you declare a customer for factoring, require not only that all of the checks from that customer go to the factor BUT may also require that you factor all of the invoices from that one customer … even if you don’t need the money. They’ll claim no minimum monthly fees BUT isn’t this the same? Be sure to ask about this and understand it completely!
6.) When my customer pays the invoice how soon do you apply it to the account when you receive it?
Find this out as this can drive your fees out of sight and for no reason. If a factor receives a check on a given day then your clock should stop on that day on the invoice payment was received. Some factors will say, “If it’s here after 2PM the bank can’t see it” BUT what about on a Friday especially if it’s a three day weekend? This could cost you more than 10% more and for what reason? None that we know of.
7.) If my reserves have cleared the bank can I get these sent early versus on the date you plan on sending them to me?
This is a big money maker for a factor, or some of them anyway. Let’s say the factor sends your reserves back bi-weekly and your check comes on the first Monday of the cycle. Did you know that that factor has free – yes free – use of your money until that have to send it back to you? Imagine being charged a factoring discount on your own money? It happens every day so get this cleared up and understand what you can and/or cannot do!!!
8.)THIS IS A MUST … Ask this: If I send you a prepared schedule of sample invoices(three to five is adequate) and when I want to factor them and create a schedule as to when these invoices get paid will you provide me a fee analysis of how your company will work with me?
What are we doing here? This is asking the factor to show you and expose any and all of their fees to you using a sample transaction model so that when you start factoring with them then there are no surprises – none. Also: When you do this require as part of your contract that this is how the model will work … and then really have some fun: Get them to state it in writing!
9.)How often do you update the information on your website with the invoice information?
This should be done daily but if not: Know when. This information eliminates the factor being able to ‘float’ your money and too to hold checks and delay applying them thus being able to charge you higher fees. DO NOT hesitate to stay in touch with your customers to find out when they mail checks and then match these up to the account information. This is not a game so don’t let anyone play one on you.
10.) Will I have a personal account manager and if something happens that affects my availability how will I be notified?
What you are asking here is will you truly have an mutually beneficial business relationship with your factor or are you a number in the system? Is there someone you can call? Are they there when you want them to be? Face it: If your money doesn’t show up for payroll leaving a message on an answering machine is not going to cut it. Will it?
BONUS QUESTION: Ask your factor to do a real time relationship analysis and estimate as to when your business will be or should be bankable and what they will do to support you in achieving that. Better yet? Get a commercial loan officer involved … this is how we do it!
Why ask this? This question will tell you outright if your invoice factor or factoring broker is creating this relationship to help your business succeed or is just trying to sell you money.
This is truly what separates the great factors from the good ones … or the worse ones.
In closing we hope that these questions are stimulating and help. As always we are available to help you answer any of the above questions at any time. We wish you the very best in Health, Happiness, and Success in all of your endeavors!