Why Use a Factoring Service?
The top performers in our review are American Receivable, the Gold Award winner; Riviera Finance, the Silver Award winner; and CapitalPlus, the Bronze Award winner. Here’s more on choosing a system to meet your needs, along with details on how we arrived at our ranking of 10 companies.
Factoring services offer an alternative to loans for companies that need a little help with funds. By selling your accounts receivable to a factoring company, you receive a portion of the amount upfront and receive the rest, minus a percentage the company takes as a fee, once the amount is collected. Unlike collection agencies, you receive the majority of your funds before the customer has paid the account, instead of waiting until after the invoice has been paid. The factoring service works to collect on delinquent accounts receivable so you can dedicate your resources and efforts elsewhere in your business. For more information on factoring services, check out our articles on factoring.
Is Factoring Worth It?
Factoring can be a risky choice for a few reasons. The most obvious is that you will lose part of what would be profit to fees. However, these fees are typically only around 1 percent. Another risk is with recourse factoring, which is the most common form of factoring. With recourse factoring, you agree to buy back any accounts that your factoring service cannot collect. Generally, you receive around 80 percent of the total amount, and whatever amount the factoring company initially fronts you, you would have to repay. This can put you in a worse position than you were in before you factored. If recourse factoring seems like too large of a risk, Factor Funding could be a good choice, as it offers nonrecourse factoring.
Another consideration is the reputation of the company you choose. If it has a history or pattern of rude or harassing behavior, you may want to look elsewhere. These are your customers the company will be contacting, and you do not want to burn bridges with loyal customers because a company presented your business in a poor light.
It's important to note that factoring companies are not collection agencies. Generally speaking, collection agencies are more aggressive with customers than factoring companies are. The main purpose of factoring companies is to improve your cash flow, not to harass your customers to pay a debt. Some will begin with notifying your customers in writing or with a phone call to ask for funds, but they generally do not drive customers away. Still, it's a good idea to make sure the company you choose has solid customer service and a helpful process rather than a detrimental one.
If factoring seems like too high a risk, you could also consider merchant cash advances, which offer different alternatives to a traditional loan and have their own advantages and disadvantages. You can also receive funding from more traditional sources and apply for different types of loans depending on your business needs.
How We Evaluated Factoring Services
When considering factoring services, we looked at features and eligibility. These included rates, fees and the processes the companies use. The eligibility requirements we looked at included the number of days an invoice can be overdue and the maximum amount a company will factor monthly. We also looked at whether or not a company offered nonrecourse factoring and what types of commitments they looked for with businesses they work with.
We contacted the companies with questions to determine information we could not verify using websites. We also gauged the overall customer experience. While some companies weren't as responsive, most of the companies we reviewed were quick to reply and supply information. They tended to be knowledgeable and very helpful.
Best Factoring Sites
The best factoring services do not charge startup or termination fees, and the percent they charge for their services will be low. If you do not wish to factor all of your invoices, you should choose a service with no invoice minimum. The best services will not have a commitment requirement, so you are under no obligation to sell your accounts in the future. Some services require up to 24 months of commitment. The best sites offer a large percentage upfront and charge low fees. Universal Funding Corporation funds up to 95 percent of your invoices upfront and charges .55 percent.
Solid customer service is something you can expect from the best factoring services. Services, including Universal Funding Corporation, offer dedicated account managers to assist you if you have questions. It's also important to look at the ease of contacting the company. Most services offer email, live chat and phone options. Some of these services also offer local branches so you can meet with representatives in person.
Factoring Sites: Picking the Right Option for You
You will want to ensure that you are eligible to use the service. Some factoring services work with specific industries, such as trucking, gas or oil. CapitalPlus specializes in working with construction companies.
All services in our lineup work with startup companies and will work with your business if you have poor credit or a bankruptcy. Paragon Financial specializes in working with companies that have tax problems. These services also consider the credit-worthiness of your customers; factoring services may not purchase invoices of high-risk customers.
The service that is best for you is also dependent on how delinquent your invoices are. Some companies don't accept delinquent accounts or only accept invoices that are up to 45 days delinquent. On average, most companies accept accounts that are overdue between 60 and 90 days. Riviera Finance has no maximum number of days an invoice can be overdue for the company to buy from you.
A factoring service's process is also a consideration. The best services have a quick turnaround time for approval and funding. All of the services we've listed have a 24-hour approval time and a 24-hour funding time. All of the services we've listed are also available nationwide and work with startup companies.
Our Verdict & Recommendation
When considering the best factoring service for you, it's important to remember that we consider all of the services we've reviewed to be good, solid companies. The best one for you depends on your needs. Be sure to consider the rates and fees of each company, but remember that they're all in the same range.
You should also make sure factoring is the right step for your company. We recommend considering a company that offers nonrecourse factoring, such as Riviera Finance, to better protect your cash flow. In addition, you should consider how much you need to factor each month and how long you need to factor, as each company varies in what it will accept. American Receivable has the highest ceiling of days, while Riviera Finance has no ceiling at all. Charter Capital doesn't accept delinquent accounts, so that's something to watch out for.
Finally, you should consider the customer service and support that each company provides. It's important to remember that they will be working with your customers, and you want to be sure your customers have a positive experience. Our best customer service experiences were with Riviera Finance and American Receivable. All of the services we've listed are solid choices; it just boils down to what's best for you.