Factoring: Evaluating invoice factoring companies

A factor is the third party debt factoring company to whom invoices are sold for instant remuneration. There are two main types: high street banks that offer invoice finance to business customers (such as Lloyds TSB and Royal Bank of Scotland) and specialised invoice factoring companies and brokers such as Touch Financial and SME.

Which invoice factoring company should you choose?

As invoice factoring has become an increasingly popular business financing option, so the number of companies offering factoring services has grown. But not all of these providers offer the same deals, factoring rates, security or customer service levels. So how do you know which factor to enter into an agreement with without being stung by hidden fees, low rates or poor service levels?

• Ensure that your invoice finance provider is a member of the Asset Based Finance Association(ABFA), the trade association for the UK invoice finance and asset-based lending market. They represent 95% of all factoring companies in the UK and guarantee that members comply with industry codes of conduct for integrity and service.
• Some factors will offer specialised contracts in your industry and these are always worth looking in to.
• Always investigate a factor’s reputation and trading history. The Financial Conduct Authority (FCA) and ABFA can offer a wealth of information on this.
• Your business specifics such as size and location. Some factoring companies will require evidence of a set minimum turnover or you may wish to consider using a local firm.
• The cash advance amount (these are the percentages you see advertised) that is being offered for each invoice. This is the money you will receive straightaway, with any remainder being paid upon collection of the debt. This is usually around 85%-90%.
• One good way of evaluating an invoice factoring company is to fully investigate their fee and commission structure. Different companies work their factoring fees out in slightly different ways, and you need to decide which will offer you the best factoring rates and the lowest fees (relative to service level). Make sure you always look into how much the base interest rate is and any hidden termination fees.
• The type and length of contract being offered as well as obligation-free trials.
• Service offered to your customers. As a factoring company is working on your behalf, you need to be sure their communication with your customers is professional and efficient.