As the economy becomes increasingly less predictable, financial service professionals are turning to invoice factoring to help their clients weather the ups and downs.

Accountants, brokers, and bank managers all play a role in helping businesses meet their liquidity, leverage, and cash flow needs. As part of the process, they often build partnerships with other providers who offer complementary products and services, including invoice factors.

Invoice factors provide cash advances to companies based on their accounts receivable. Also known as accounts receivable funding, invoice factoring enables companies to short-circuit lengthy payment cycles by receiving cash from the factor as soon as the invoice for goods or services has been issued to the customer.

Factoring partnerships are on the rise

Businesses are under more financial pressure than ever before, and the people who support their financial stability are exploring every avenue, including alternative financing options. By lining up both traditional and alternative financing options for their clients, financial service professionals can ensure they are better protected from the effects of an unpredictable economy.

However, while alternative options such as merchant cash advances (MCAs) and online loans charge prohibitively high fees and interest rates, invoice factoring offers reasonable rates and greater flexibility. And because it accelerates the invoice-to-cash cycle, it’s an especially popular solution for business-to-business companies with lengthy payment cycles.

Benefits of partnership with a factor

Partnering with an invoice factoring company can benefit both the service provider and their clients.

This type of financing fills a critical gap for businesses that need additional cash and have exhausted traditional financing options, either because they are already fully leveraged or because their credit rating prevents them from qualifying. Because factors provide cash based on the value of the invoices, they are primarily interested in the creditworthiness of the business’s customers, not the business itself. As a result, even new companies with no credit history or companies with low credit scores can access cash through factoring.

Factoring also benefits the referring partner, who can enhance the value they provide their clients by introducing them to an innovative means of improving cash flow and financial stability. Referring partners also receive a commission from the factor for every successful referral.

For banks, there is an added advantage: If a client is unable to discharge their loan obligation, the cash generated by factoring can be used to service the debt in addition to providing operating funds to the client. Because the bank manager retains the primary deposit relationship, they can help the client qualify for further traditional financing options as their debt ratio and credit score improve.

How factoring works

When you refer a client to a factor, the factor will work with them directly to determine whether they are a good fit for the service and help them access the cash they need.

Step 1: The factor conducts due diligence. This process involves getting a Dun & Bradstreet report to evaluate the financial history and creditworthiness of the client and their customers as well as reviewing the UCC filings (in certain states) to see the list of lenders the company has worked with in the past.

Step 2: The factor collects evidence, such as a bill of lading, that proves the invoiced product or service has been rendered.

Step 3: If the client successfully passes due diligence, the factor buys the client’s invoices and gives them up to 90% of the value in cash immediately. Once the invoice is paid, the client receives the balance of the funds.

Step 4: The factor takes over the collections process on the client’s outstanding invoices to ensure timely payment.

How to select a factoring partner

Different invoice factors can offer very different terms and services. It’s important to evaluate factors carefully to ensure that they offer competitive rates, favorable terms, and have the best interests of your clients at heart.

The questions listed below can help you collect the information you need to make an informed choice and select a reputable partner whose ethics and service levels match yours.

• How long has the factor been in business? Factors with longer histories are likely to be more stable and more experienced.
• Does the factor have industry experience? A factor who has worked with businesses in the same industry as your clients will do a better job of anticipating and meeting their unique needs.
• What kind of contracts does the factor offer? Some factors lock businesses into a lengthy contract with a minimum of one or even two years. Others require businesses to commit to a minimum number of invoices or a minimum dollar amount per month. Ideally, the factor will offer flexible contracts that allow the company to factor as many or as few invoices as they need to, which minimizes fees while ensuring the business can access the cash they need.
• Can the factor share a sample contract? Factors should be ready to forward a boilerplate contract so that you can review the terms that will apply to the clients you refer to the factor.
• How long is the cancellation notice period? Some factors have cancellation practices that require 90 days’ notice or more and cut off funding as soon as the business cancels the contract. This can leave businesses with a funding gap during the cancellation period.
• What is the standard fee for factoring? The fees charged by factors can vary widely, as can the penalties they apply when companies fail to meet contract requirements.
• How quickly can funding be made available? There are no standard time frames for funding. Some factors take days or weeks to make the cash available, while others—AR Funding included—can offer same-day funding.
• What kind of partnerships does the factor maintain? Some factors know how to work closely with brokers, accountants, and other financial service providers, while others are not set up for this kind of relationship. Before referring clients to a factor, ask how many partnerships they currently maintain, how long these partnerships last, and ask to speak to two or three of these partners.
• Does the factor charge an up-front due diligence fee? Some factors charge a standard fee that can reach thousands of dollars, which is charged even if the company doesn’t pass the due diligence process. Look for a factor with a reasonable fee that is only applied to successful applicants.
• Can the factor introduce you to current customers? If the factor refuses to let you speak to their customers for confidentiality reasons, it’s a potential red flag. A factor should be willing to connect you to two or three factoring customers so that you can speak to them about their experience with the factor.

A valuable business resource

As the business economy becomes more complex and unpredictable, financial service providers need to expand their network and explore every option to help their clients succeed.

Partnering with a reputable factor gives you one more financial resource to help clients accelerate cash flow, but not all factors offer the same terms or levels of service. By understanding how factoring can fit into the business’s overall financial goals and selecting a factor whose priorities and values align with yours, you can ensure that the partnership enhances your reputation and your client’s outcomes.

If you’re a broker, accountant, or bank manager and you’d like to learn more about how invoice factoring can benefit your clients, let’s talk.