factoring law

Factoring and the law: Selecting a factoring company

With hundreds of factoring companies operating across North America to help business owners resolve cash flow challenges and grow their companies, it’s not surprising that some factoring companies provide clients with an outstanding business experience and some do not. While factoring companies provide unique benefits and advantages that traditional funding sources, such as banks and credit cards, cannot offer, factoring companies also have different responsibilities and regulations from a legal perspective.

While most factoring companies are well capitalized and employ financial professionals who adhere to high standards in everything from disbursements to customer relations, every year a very small fraction of factoring clients run into problems with their factoring companies. The good news is that a reliable and trusted factoring company can help people who are dissatisfied with their current factoring company and assist them in changing companies.

Business owners can help themselves from the beginning with more careful due diligence and advance vetting before they ever sign up with a factoring company. The old adage about “beware of a deal that sounds too good to be true” fits in the financial industry at all levels. Your protection against bad players in any field starts with distinguishing between trustworthy partners and those that do not work toward your best interests.

What are the warning signs about a factoring company?

When you research factoring companies, either online or through asking friends whose companies factor their invoices, do your homework first. Study the factoring company’s website for clues and speak with representatives at the factoring company to learn more. Pay attention to what the representatives tell you.

Here are some signs that may or may not indicate red flags for you. Perhaps one or two warning signs about a factoring company may not be a deal-breaker in your selection process, but all four do not bode well.

Watch out if the factoring company …

  • Has not been in business long. A brand-new company, without a track record of helping companies succeed, is a signal that you need to do extra research. You don’t want to partner with inexperienced people or be a “guinea pig” for a startup factoring company’s software and processes. Your operations budget is too important.
  • Pressures you to sign up right away. If a deal is good today, it’s good tomorrow. Don’t give in to some sales person’s time-dictated quota desperation. You are “hiring” a factoring company to work for you, not the other way around. You are entitled to take as long as you need to make a decision.
  • Provides evasive answers to your questions. As you get to know more about a factoring company through your questions, be wary of someone who avoids straight answers. Keep asking questions until you are satisfied that you understand exactly how the factoring company will work with you and how much it will cost.
  • Has factoring rates that sound “too good to be true.” Factoring rates vary widely based on a client’s monthly dollar volume, the clients’ customers’ creditworthiness, and other factors. Yet the actual cost of money that a factoring company can access varies very little, so a company that gives you an unusually low factoring rate will have to make up the difference somewhere else. If you are quoted an atypically low factoring rate, make sure you understand all the costs that the factoring company will add for you to pay. Watch out for hidden costs.

What should you look for in a factoring company before you sign up?

IFA LogoThe following characteristics of a factoring company tend to be positive signs that you would be dealing with a trusted and well-established financial partner.

Find out if the factoring company …

  • Belongs to the International Factoring Association (IFA). Membership in IFA is a good sign that a factoring company will adhere to the stringent code of ethics that is at the heart of this nonprofit worldwide professional association.
  • Belongs to its community Better Business Bureau (BBB). The BBB is one of North America’s strongest business organizations, with branches everywhere. Earning a high BBB accreditation score – especially a BBB A+ ranking – reflects a strong business with good reviews from users.
  • Can share references and positive reviews with you. Sometimes you need to hear what clients say about a company, whether you speak to a current client or read testimonials. These conversations and comments will give you a good picture of a factoring company
  • Employs client-focused, experienced professionals who want to help you. If you are enjoying positive interactions with the people at the factoring company you are considering, this bodes well for strong and knowledgeable customer service once you are on-boarded.

What ethical practices should you expect from your factoring company?  

The International Factoring Association Code of Ethics requires IFA members to follow certain guidelines for the good of the industry and for the good of the clients of factoring companies. Below are a few key points of the code; please visit factoring.org for the complete list.

Factoring companies that belong to the IFA must conduct themselves according to the code’s strict ethical principles, which include:

  • Highest levels of professional ethics as expected by the business community
  • Highest levels of industry competence through continued education
  • Honesty and thoroughness in dealings with clients, client’s customers, lenders, and others
  • Accurate accounting systems to track each client’s transactions.
  • Confidentiality of client information
  • Facilitating clients’ moving from one factoring company to another factoring company if clients want to switch
  • Abiding by local, state, and federal laws
  • Avoiding conflict of interest
  • Fair treatment of people, regardless of race, religion, gender, disability, age or national origin

What can you do if you have a bad experience with a factoring company?

If your factoring company demonstrates warning signs or does not belong to the International Factoring Association and follow the IFA Code of Ethics, it is possible that you may encounter difficulties. While the vast majority of factoring companies are strong funding partners for their clients, a very small percentage of the companies are not. As in any industry, not all companies are the same.

If your factoring experience takes a bad turn, you would do well to document examples of irregularities, broken commitments, mismanagement, or other concerns. With these examples at hand, ask to discuss these with the company’s upper management. If you cannot receive a satisfactory resolution for a problem that you encounter, legal action can be taken. However, bringing in a lawyer over any dispute can be expensive and disappointing. Legal mediation or going to court does not always result in satisfaction or reimbursements. Sometimes the best advice is to simply switch to a different factoring company.

How can Interstate Capital help you get out of a negative factoring relationship?

Some business owners contact Interstate Capital for assistance in switching factoring companies. Interstate Capital can assist them in getting out of a current contract with another factoring company. Through buyouts and negotiation with the other factoring company, the professionals at Interstate Capital can facilitate a change.

As a company that will work with you to get you on the right track again, Interstate Capital can help you get back to improving your cash flow and growing your business. The end goal is a positive funding solution to keep your company on the road to business success.

If you would like more information about Interstate Capital’s track record in helping clients switch factoring companies, contact Interstate Capital and speak with a knowledgeable representative. Your business deserves a reliable and trustworthy funding partner.

You can start with a call or you can request a no-obligation factoring rate quote by clicking here.


About Interstate Capital

The Interstate Capital Group of Companies operates businesses in the factoring, freight brokerage, freight matching, and payable discounting industries.