Important Questions to Ask Before Signing a Factoring Agreement

Business owners dissatisfied with terms of contract

Invoice factoring is a great way to get immediate cash flow, but much of your experience depends on the factoring company you choose. We’ll explore the basics of the factoring process below and highlight a few questions you can ask as a small business owner to help ensure you choose the best invoice factoring company and build a stronger business in the process.

Familiarize Yourself with Invoice Factoring Before You Begin

Also known as accounts receivable financing, invoice factoring works differently than other business funding solutions and transactions. You can think of it as an advance on your B2B invoices, which are the collateral. Rather than waiting weeks or months for your clients to pay, invoice financing companies can purchase your invoices and give you the cash right away.

How do factoring companies make money?

Factoring companies usually only advance a portion of the invoice’s value upfront. The amount varies depending on your industry and other considerations, but it’s usually between 80 to 90 percent and can be even higher for transportation and staffing industries. When your customer pays the factoring company for the invoice amount, the factoring company deposits you the remainder, minus a factoring discount fee, which the company retains as payment for their services.

What is a factoring fee?

Factoring fees are usually represented as a percentage of the total invoice value. The amount charged will typically be a few percent. However, factoring rates vary based on the factoring company you choose, how long it takes your customers to pay, and how large your company is. Depending on the circumstances, some of the factoring fees at Charter Capital can even be lower than one percent.

Do banks do factoring?

Banks are geared toward providing loans, which earns them payments for fees and interest. Since factoring isn’t a bank loan—you don’t borrow and don’t have a debt to pay back—it’s not a service banks typically provide.

Get to Know Each Factoring Company

Factoring companies all work a bit differently. You can do a bit of research before you connect with one to determine if your time will be well spent.

What kind of reputation does the factoring company have?

The best source of information is often customer testimonials when it comes to gauging a factoring company’s reputation. Have a look around the net to see what people are saying about any firm you’re considering. At Charter Capital, we make it easy by sharing factoring reviews on our website.

What services do they offer?

Even if a company’s sole focus is invoice factoring, they may provide additional services to help you build a stronger business. For example, Charter Capital offers fuel cards to freight factoring clients.

10 Questions to Ask Factoring Companies

Getting answers to the right questions before signing a factoring agreement will help ensure you choose the right one and know what to expect. Ask the ten questions below to any factoring company you’re considering, so it’s easy to see which one is right for you.

1. How quickly can I get funding?

The timeline is different for each company, though a few business days is fairly standard. Charter Capital provides same-day funding upon request.

2. What kind of customer service do you offer?

It’s easy to feel like a number when you work with a large factoring company. However, you’ll have a dedicated account manager when you partner with Charter Capital. This person will be your main point of contact and will assist you as needed on an ongoing basis, so you’ll be working with someone who’s not only a factoring specialist but who also knows you and your business well.

3. Does the factoring company provide credit protection?

The level of credit protection you receive will vary from one company to the next too. At Charter Capital, we are interested in the creditworthiness of your customers, so we perform credit checks on them to verify they’re creditworthy in advance. That way, the likelihood of non-payment default dew to a bankruptcy is diminished, your cash flow remains steady, and your credit is protected.

4. How much is advanced?

Factoring companies usually advance 80 to 90 percent of an invoice’s value, and it can be even higher for transportation and staffing. Naturally, the greater the advance, the bigger the cash flow boost your business receives.

5. What are the rates and fees?

Factoring fees covered earlier are only one expense a factoring company may charge. While Charter Capital makes a point of providing transparent pricing, be on the lookout for commonly hidden fees such as:

  • Application and Startup Fees
  • Servicing Fees (Also Called Administrative or Maintenance Fees)
  • Invoice Processing Fees
  • High ACH and/or Bank Wire Fees
  • Monthly Minimum Fees
  • Audit Fees
  • Minimum Fee Per Invoice
  • Check Clearing Days
  • Termination Fees
  • Penalties

These types of fees can make an otherwise low appearing factoring rate much more expensive than it would otherwise appear.

6. Do you manage accounts receivable for me?

It’s usually a nice benefit when a factoring company handles your accounts receivable for you because it frees you from chasing payments. It’s even better if they offer perks to your customers, like multiple payment options, as it boosts customer service. Also, make sure to discuss what type of contact the factoring company will have with your customers. Check the factoring company’s reviews and make sure you are comfortable that any customer contact will be handled in a professional way.

7. How are credit checks carried out?

If the factoring company runs credit checks on your customers before accepting their invoices, find out what the process is like. At Charter Capital, the process is quick and free, but this isn’t always the case with other companies.

8. What are the invoice factoring requirements?

The terms will vary for each company. Find out whether you can choose which invoices you want to factor, or if you’re required to factor all your invoices. You may also need to ask this on a per-client basis, whether you’ll need to factor all invoices for a specific customer or if you can choose only certain ones.

9. What is the contract period?

Some companies tie you into long-term contracts. Make sure you understand what your obligations are and choose a company that fits your needs.  

10. What other services and support do you offer?

Dedicated account managers and free credit checks are things Charter Capital offers to all our clients. We also have industry-specific perks. For example, trucking companies may qualify for fuel advances and fuel cards. Freight brokers can do carrier Quick Pay too. Always ask what other services a factoring company provides, so you can maximize the benefits and get the most out of your relationship.

Connect with Charter Capital and Get a Free Rate Quote

If you have any remaining questions about factoring, factoring agreement, or how Charter Capital can help, our team is happy to assist. Simply provide us with a few details about your business, and we’ll be in touch with a complimentary rate quote promptly. Get started now.

Co-founder and executive manager of Charter Capital specializing in accounts receivable factoring dedicated to fast, solution oriented funding to satisfy working capital needs of most B2B businesses in manufacturing and service industries, including but not limited to businesses in transportation, staffing, security, maintenance, repair, wholesalers, distribution, fabrication, industrial labor, and oil & gas.