Reputable companies offering small business factoring are very clear, open and transparent. They provide information both on their website and in the factoring quote information that clearly outlines the scope of their services and what the fees and costs will be.
Unfortunately, not all small business factoring companies are as concerned about customer service and about being transparent in their business practice. The good news is that with just a bit of reading and confirming information, a small business owner can avoid these types of companies and work with a factor that will provide a positive experience.
Failing to Understand Fees
Some small business factors will charge a lower rate on their services which appears, at least at first glance, to be a cost-saving option. However, they then tack on fees for everything from applications to due diligence and even if you choose to terminate the contract.
Make sure all fees and costs are clear in your agreement with the factor. Avoid companies with a lot of fine print or complicated and complex agreement forms.
Not Understanding the Type of Factoring
Non-recourse factoring provides your company protection in the event the customer fails to pay. Many factors will offer recourse factoring, which means that your business will have to pay if the customer defaults. Yet other companies may offer what appears to be non-recourse, but it really only applies to very specific situations for the customer’s reason for nonpayment.
Not Checking Minimum Volume Requirement
One easy pitfall in small business factoring is the minimum volume requirement for some factors. This will require you to factor a set dollar amount of invoices per month or quarter. If you don’t meet those minimum requirements, you can face a significantly higher rate or penalty.
Take the time to understand the contract or agreement for factoring services. Top companies will make it easy for your business and will provide clear, uncomplicated information to help you decide.
