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Five Questions to Ask When Choosing an Accounts Receivable Factoring Firm

Five Questions to Ask When Choosing an Accounts Receivable Factoring Firm

Philip Cohen

Selling its invoices to a factoring firm is a great way for a medical staffing agency to ease cash flow tensions. However, working with the wrong factoring company has the potential to create an entirely different kind of cash flow pressure. This article discusses five specific questions business owners should ask to help them find the right factor for their medical staffing agency.

1. Do you understand the medical staffing industry?
Partnering with a factor who understands the unique characteristics of your industry ensures that the ongoing factoring process will run smoothly. Instead of wasting valuable time explaining industry jargon, traditional payment terms and/or day-to-day business procedures, work with a funder who already knows the medical staffing industry. It allows you to focus your attention on more important matters—like growing your business.

2. How flexible is your factoring program?
Medical staffing agencies should ask about a factoring firm’s ongoing funding requirements to help them understand the factor’s expectations ahead of time.

Examples of such questions are written below:

  • Is there a specific length of time that I’m required to remain in the factoring relationship?
  • What are the penalties if I decide to terminate early?
  • Do I have to sign a personal guaranty?
  • Am I required to sell all of my invoices?
  • Is there a minimum dollar amount of invoices I need to factor? And if so, what are the penalties involved if I do not meet the minimum requirements?
  • Is there a maximum funding amount?

Although there are some factoring firms who will answer NO to all of these questions, many will not. It’s important for business owners to know the level of flexibility their intended factoring company can offer so they won’t be surprised later on in the business relationship.

3. How long will it take to get my questions answered?
A good factoring firm is available when its clients need it. Pay attention to response times for both email and telephone communications during the sales process. Take note of who responds to your inquiries as well. Some factoring firms assign personal account managers to each of its clients; other companies have a team of employees that share responsibilities for all of its clients. Regardless of how many people are working to fund your business, make it a priority to choose a factoring company who offers a level of customer service that meets your standards.

4. How long have you been in business?
More than ever, it’s important for business owners to work with a factor that has a reliable track record in the factoring industry. In difficult economic times it is critical to select a factor with both staying power and the highest level of ethical standards. One way to accomplish this task is by choosing a factoring firm who is affiliated with the International Factoring Association (IFA). Factors who are members of the IFA adhere to a strict code of ethics and business practices.

5. What are your fees?
When a factoring firm advances money on receivables, it’s actually making a legal purchase of the invoices at a discounted rate. This discounted rate can be a one-time flat fee, or it can vary depending on how long the factor owns the invoice. In general, discount fees vary and are influenced by a number of things, including the contractual commitment, the average monthly purchase volumes, the average size of the invoices sold, the number of account debtors (customers) that will be factored, and the credit quality of those debtors.

There are numerous other possible fees that a factor could assess, such as fees to cover the costs of running credit checks on account debtors, compiling and shipping legal documentation, and filing liens. A business owner should also be familiar with a factor’s “penalty fees”, such as extra charges for misdirected payments, aged invoices, or early contract termination.

There are more variables to consider when choosing a factoring firm that could not be explained adequately in this article due to constraints on space. Remember that there are a lot of factoring companies out there, each with their own unique practices and policies. To find the best factor for your needs, make it a priority to ask the questions shared within this article.

Philip Cohen is the President of PRN Funding, LLC. He can be contacted at 866.776.5407 or by email at pcohen@prnfunding.com.