Factoring accounts receivables and invoice factoring are cash flow financing strategies and working capital funding programs offered by Capital Funding Solutions to small businesses and companies



Invoice Factoring Companies:
Decision Criteria for Selecting a Factor, Part III


Invoice Factoring Pitfall #11 – Reserve accounts are abused.

Reserve accounts are common to the factoring industry. They serve as a security deposit to protect the invoice factoring company against short or no payment on invoices. Some factors hold a certain percentage of each invoiced amount in their Special Reserve Fund for just this purpose. However, since reserve funds are really your money but under the invoice factoring company's control, they are sometimes misused. Therefore, it’s important that you understand how your intended factoring company handles your reserve account.

Receivables Factoring Pitfall #7 above outlined the structure of a cash flow factoring fee. The Reserve fund is the remaining part to this discussion.

To review, let’s say the factor advances you 80% of your invoiced amount immediately upon receiving your invoice. When your customer pays your invoice, the factor places the remaining 20% into your Special Reserve account. Once the payments clear, the factor subtracts his fee and remits funds to you that represent the difference. At least that’s how it should work.

Sometimes, an invoice factoring company insists on maintaining a permanent reserve account of 5 – 10 percent of your monthly invoiced amounts. This procedure is good for the factor, but not necessarily for you because:


 


The factor denies you full use of your funds


 


Funds may be extracted from the permanent reserve to pay monthly minimums, should they be required


 


The factoring company may delay returning your funds upon agreement termination, or sometimes only after a struggle
 

The better deal is to work with a factor that remits all of your reserve funds upon invoice clearance less the agreed factoring fee.

We urge you to clarify with your prospective invoice factoring company:


 


how they set up a reserve account


 


do they require a permanent reserve


 


and if so, what terms and conditions govern how they disburse funds from the reserve during relationship and at its termination

 

Again, carefully read your proposed agreement to understand fully how the reserve account is treated. This will tell you a great deal about the business practices of the factoring company, and also possibly save you much grief if the relationship proceeds.

Finally, you are better off working with a factoring company that does not maintain a permanent reserve fund, but since each situation varies, this is not a hard and fast rule.

Business Financial Factoring Pitfall #12 – Inadequate reporting procedures

Since cash flow and knowing about it is the lifeblood of any business, you would think that all factoring companies would be set up to provide proper, easily understood reports on your accounts receivable activities. However, this may not be the case.

Therefore, you really need to check out the accounts receivables factoring company’s financial reporting procedures and processes to ensure that they will work for you.

In any relationship with a receivables factoring company, you will benefit by having ready access to current, easily understood, verifiable financial reporting about your accounts receivable transactions. This allows you to operate your business successfully, while preserving your peace of mind.

Ideally, you want to have 24/7 access to your account information and know that your reports are current all the time. In addition, having a verifiable audit trail is also advantageous.

Invoice Factoring Pitfall #13 – Not Understanding Your Agreement

As you can see from the above, the future of your business can hinge on how well you understand the intent and language of the factoring agreement you are considering entering. A bad agreement can lead to an overly expensive or truly bad experience that could end up costing you a great deal as outlined in the examples above.

Since factoring arrangements differ in their language and their intent, you want to read your proposed contract very carefully and seek clarity from your intended factor.

SUMMARY ACTION LIST

Having read this far and worked the examples, you should now know what pitfalls lurk out there in the factoring industry. To be sure, ethical factoring companies do exist, ones who share your values and ethics, and who see themselves as a valuable partner in the growth of your business.

All you have to do is find one and then perform your due diligence. As always with financial matters, it’s much better to do this before you desperately need funds so you have a relationship already in place that allows you to comfortably and confidently plan your growth.

Apart from what is presented above, here are some useful guidelines:


 
1.


Work with an ethical factoring company that has a verifiable track record.


2.


Ask for and check client references


3.


When talking to current or past clients, ask them, “Knowing what you now know about company X, would you use them again to factor your accounts receivables?” Then, listen carefully to the response.


 
4.


Have a personal conversation with the people at the factoring company who will administer your account, and have them confirm the accuracy of the information from the sales staff.


5.


Ensure the factor’s reporting system operates in real-time via the Internet to give you current information on your accounts receivables, etc.


6.


Ensure that you fully understand how each fee is determined to avoid being surprised by fee nibbling in the future.


 
7.


Read the language of your proposed agreement very carefully and seek clarity on anything that you don’t understand.


8.


Before signing on the dotted line, be certain you really know the deal you are getting with all of its ramifications.


9.


Finally, speak with the “good guys” of factoring – the two Gregs – Greg Curley and Greg Porter at Capital Funding Solutions in Ft. Lauderdale, FL. They are professionals, who take pride in their pledge “Your Financing! Delivered quickly and ethically”.






Factoring Informational News Articles
Selecting an Invoice Factoring Company: Best Practices, Part I
Selecting an Invoice Factoring Company: Best Practices, Part II
Selecting an Invoice Factoring Company: Best Practices, Part III

 


 


Cash flow funding and working capital financing programs are offered to small and medium businesses in Clearwater Orlando Miami Ft. Lauderdale Tampa and St. Petersburg Florida
www.finance-factoring.com


Capital Funding Solutions



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