Aside from the disadvantages already mentioned, there are
a number of things you should be aware of as regards invoice
factoring:
Term of Contract and termination clauses. A typical
contract with a factoring company runs 12 months or more.
After the initial term, contracts can be terminated - there
are no set rules, read carefully (varies from notice periods
to contract anniversary). Termination is always subject
to full repayment of the funds.
Trial period. Some factoring companies have a trial
period when you begin using their services: "if you don't
like it", you can end the contract after the first few months.
Termination is always subject to full repayment of the funds.
Reputation and references. The factoring company
will be a critical interface with your customers. Make no
compromises. Work with a reputable firm to eliminate all
risk of negatively influencing your customer relationship.
Ask for references. Check if the factoring company is a
member of the Factors and Discounters Association.
Personalized service. Particularly if you are a
small company, make sure to have a customer service team
available for you.
Exports factoring capability. If you export make
sure the factor has its own network, or affiliate partners,
in your customer's country to provide on the spot collection.
Bad debt protection. Some factoring companies offer
this additional service, some don't. Ask!
Chose the factoring company according to your customer
profile. Whether your customers are other businesses,
or individuals is an important criteria in choosing your
factoring company.
Transfer restrictions of your outstanding invoices.
Make sure there are no existing contractual arrangements
disallowing the transfer of your outstanding invoices to
a factoring company. For example a loan that is secured
by your outstanding invoices.
Information requirements to open an account with a
factor. The factoring company will ask you to fill in
an application form and provide additional documents and
accounting statements you would also typically give to your
your bank when taking out a loan. Be prepared to give a
detailed overview of your customers, and if you request
bad debt protection, their risk profile.
