Is Your Factoring Company Well Capitalized?

Is your factoring company well capitalized? Better hope so. With so many factoring companies operating today, some of are not financially strong and some are run by people with little experience in the factoring industry who hope to turn a quick profit and get out. Before you partner with a factoring company to improve your cash flow, look for signs showing financial stability and longevity.

Most factoring companies rely on borrowed funds and outside investors to finance their ongoing purchase of clients’ accounts receivable. Like many other borrowers, factoring companies have seen the availability of credit retract or even disappear. Your factoring company’s access to capital is as important as your own. The reality is that now more than ever, the financial future of your family and your business rests with working with the best factoring company possible for your business needs.

Here are four questions to ask when you are comparing factoring companies that will help you better understand if the company is well funded and stable.

1. How is your factoring company funded?

Factoring companies that rely heavily on borrowed funds and outside investors as their primary source of capital are subject to the demands of those lenders and investors. For example, a lender might restrict how much credit it may approve for a factoring company’s customers. Likewise, outside investors may unexpectedly pull their funding without notice, leaving the factoring company unable to support its customers— or worse. One key measure of the soundness of your factoring company’s balance sheet is its debt-to-equity ratio— that is, the comparison of how much they borrow relative to their net worth. Some factoring companies borrow five or more times their net worth. And because they are not required to maintain any capital, theoretically, factoring companies could borrow all their necessary funding. The more reliant your factoring company is on borrowed funds, the more risk is passed on to you. When it comes to a sign of the stability of a factoring company, the less borrowing, the better.

2. Who’s making crucial financial decisions for your factoring company?

Your best bet is to work with people with decades of experience in the invoice factoring field. Ask about a prospective factoring company’s decision makers and their years in the business. Experienced factoring experts have the knowledge and the instincts to know how to best help clients resolve their cash flow needs. At some factoring companies, you have direct access to the owner of the factoring company, who can make decisions for you at the drop of a hat. You also want a factoring company that ensures that the professionals who handle your account on a day-to-day basis have instant access to the company owner. Experienced decision makers represent a positive sign for your business.

3. How large is your factoring company?

Find out how many clients the company currently serves and has served in the past. A reputable company will typically have lots of clients because of referrals from satisfied clients. Size is an important indicator of success. If a company is too small, that can raise some concerns. For instance, although you want to remain a priority for your factoring company, if your business represents more than 5% of your factoring company’s volume, be cautious. On the other hand, if your factoring company focuses on clients factoring half a million dollars a month and your business can factor $10,000 a month, the level of customer service you receive is likely to suffer. A healthy pattern of growth for a factoring company is a good sign of financial stability over the long haul.

4. How has your factoring company been in business?

Factoring companies are largely unregulated private companies that suffer the same rate of failure as businesses in general. To avoid any potential financial pitfalls, seek out a factoring company that has a long track record of solid business practices, one that has built up its retained earnings and that uses primarily its own capital to fund its operations. The stronger its capital base, the better your factoring company can withstand economic uncertainty. A good rule of thumb is to do business with a factoring company that IS a factoring company and has been a factoring company since its founding. You don’t want to risk factoring with a subsidiary of an international conglomerate, a bank, or an unrelated corporation that has acquired a factoring company as an investment. In some cases, parent organizations no longer saw factoring as an important part of their business. In others, factoring companies were simply not profitable to shareholders and they closed their doors. Longevity is a good sign of a well-funded factoring company.

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Know Your Factoring Company Before You Start

know your factoring companyUsually, managers of a good factoring company will be entrepreneurs, like you. In some cases, you can have direct access to the owner of the factoring company, who can make decisions for you immediately with no waiting. However,  the larger the organization, the less likely it is you will receive the attention you deserve.

This can be particularly problematic for the typical factoring client, who needs something that’s “outside the box.” Too many factoring companies employ inexperienced account representatives with little or no authority to make important decisions. What becomes more problematic is when larger organizations block the client from having direct access to senior factoring company management. It is critical to the success of a factoring relationship that the client has access to senior factoring company executives.

Strong working relationships start with a common philosophy between factoring company management and the client. For example, if strong credit underwriting is the culture of a factoring company but the client places no emphasis on the value of strong underwriting, the difference in philosophy may make for a rocky relationship. Likewise, if the factoring company places a strong emphasis on collections but the client would prefer not to bother his customers with collections calls, that too could pose a problem.

Not all factoring companies think alike. Some emphasize collections. Some focus on credit underwriting. Some utilize technology. Some provide a wide array of reports to assist clients with their bookkeeping needs. Some specialize by industry, some by the size of a deal. It is important to decide what kind of factoring company fits your business model best.

You also want to ensure that you are not your factoring company’s largest account. If your business represents more than 5% of your factoring company’s volume, the company may not have enough capital to handle your needs or future growth. On the other hand, if your factoring company’s sweet spot is $1 million and you wish to factor only $10,000 per month, you likely will not receive the attention you deserve. Consult with your Interstate Capital account manager to ask if we’re the best fit for you.

Interstate Capital is proud of the fact that we have the size, stability and capital strength to serve clients wishing to factor business of any size. We try to treat every client as if they are our only one, each having full access to Interstate Capital senior-level executive management. Our executive team is hands-on in all aspects of our business.

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About Interstate Capital

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