Things To Watch Out For
- Term of Contract and termination clauses.
A typical contract with a factoring company runs 12
months or more. After the initial term, contracts
can be terminated - there are no set rules, read carefully
(varies from notice periods to contract anniversary).
Termination is always subject to full repayment of
the funds.
- Trial period. Some factoring companies
have a trial period when you begin using their services:
"if you don't like it", you can end the
contract after the first few months. Termination is
always subject to full repayment of the funds.
- Reputation and references. The
factoring company will be a critical interface with
your customers. Make no compromises. Work with a reputable
firm to eliminate all risk of negatively influencing
your customer relationship. Ask for references. Check
if the factoring company is a member of the Factors
and Discounters Association.
- Personalised service. Particularly
if you are a small company, make sure to have a customer
service team available for you.
- Exports factoring capability. If
you export make sure the factor has its own network,
or affiliate partners, in your customer's country
to provide on the spot collection.
- Bad debt protection. Some factoring
companies offer this additional service, some don't.
Always ask because it’s your company, and this
is a major decision to be taking!
- Chose the factoring company according to
your customer profile. Whether your customers
are other businesses, or individuals is an important
criteria in choosing your factoring company.
- Transfer restrictions of your outstanding
invoices. Make sure there are no existing
contractual arrangements disallowing the transfer
of your outstanding invoices to a factoring company.
For example a loan that is secured by your outstanding
invoices.
- Information requirements to open an account
with a factor. The factoring company will
ask you to fill in an application form and provide
additional documents and accounting statements you
would also typically give to your bank when taking
out a loan. Be prepared to give a detailed overview
of your customers, and if you request bad debt protection,
their risk profile.
Also check out our Disadvantages
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Invoice
Factoring Guide
