Get the facts before you factor
Shopping for the right factoring program for your company can be a challenge. Each Finance Company operates differently, therefore fees and services may vary considerably. The following information has been developed as a guideline to help you in the decision making process. Take a moment to carefully read this information. Whether you ultimately decide to utilize our services or the services of another Finance Company, please be sure you have answers to the following questions before you sign any letter of commitment or Security Agreement. We hope this makes the challenge of shopping for the best possible finance program easier.
* UCC-1 Filings/Proposals
Some factors will present what appears to be a “non-binding” proposal to your company to get the ball rolling, so to speak. Do not sign a proposal which contains language authorizing the factor to record a UCC-1 Financing Statement on you and your company. This effectively means that you have just legally allowed the factor to take a secured position on all the assets of your business (equivalent to recording a deed of trust on a piece of property). In the event you change your mind, and do not wish to pursue a business relationship with this particular factor, you will be faced with the unpleasant task of getting the lien released. Often times, the factor will charge you a fee to release the UCC filing.
* Proposal/Security Agreement
Do not accept a Proposal as being the underlying document to your Security Agreement. Proposals typically present the bare minimum facts and will not emphasis the more unpleasant parts of the actual Security Agreement such as guaranteed minimum fees, actual contract terms, audit fees, line renewal fees, etc. The factor is betting you will simply sign their Security Agreement and assume that all the pertinent contract details were outlined in your proposal.
* Master Agreement
Do not sign any agreement which states you agree to “the terms and conditions” posted on an internet site if you cannot access the referenced internet site, view, and print out a written copy of said “terms and conditions” for you to carefully review. Recently we have seen many trucking companies fall into this trap. Certainly you have heard the expression, “Moving the goal post”. Without a written, physical copy of an executed Security Agreement signed by all parties, how can you be sure the rules of the game don't change?
* Length of Contract
Be sure to read the termination clause in your contract, do not take the word of the factor's salesperson. The term “90 day minimum” may be used. But if you read the actual contract terms you only have a 30 day window from the date you sign your contract to terminate, otherwise you are locked in for up to another year and a half. Many contracts provide a very small window in which to terminate. In the event your funding becomes less reliable, or there is a breakdown in your relationship with the factor, can you go somewhere else without paying unreasonable termination fees? If a factor has confidence in the level of service they provide, there is no need to lock customers in to long term contracts with a limited 30 day window each year in which to terminate.
* Line of Credit
What is your maximum line of credit and will it be sufficient? In the event you experience an unexpected growth spurt and require additional funding, how long can you expect it to take to increase your line? Will it have to go to a loan committee where your request can sit for several weeks or months?
* Covenants
Are there specific financial requirements your company must meet in order to maintain this line of credit? If your company does not meet one or all of these requirements, will funding cease immediately?
* Flexibility
Are you required to sell all of your invoices or can you select the accounts yourself? How much control of your business do you keep?
* Funding Policies
How long will the factor need to process and fund your accounts receivables? How will these funds be transferred to you? Are there any charges associated with a wire transfer? Will your bank charge you when they receive the wire transfer?
* Advance Rate
This number can vary anywhere between 75%-95%. Be sure your advance provides you with enough cash to operate your business.
* Fees
Make sure you understand exactly what you will be paying for the factoring line. Are there any ambiguous references with respect to fees you do not clearly understand? Are you obligated to pay fees to the factoring company monthly even if you do not utilize their services? Does the factor have different rate structures? For example, will your rate double when a payment is received by the factor on day 16 instead of day 15? Get any necessary clarifications in writing.
* Fee Statements
Request sample copies of fee statements from your factor. Do you understand these reports? You don't make money trying to analyze your month end fee statements from your factor. These reports should be easy to read and uncomplicated.
* Credit Checking and Analysis
Will the factoring company run credit reports for new or existing customers? If credit agencies have limited information, are they willing to call on credit references themselves to help accommodate you? Are you charged any additional fees for this service?
* Credit Approval
How does the factoring company determine which customers of yours they will accept? Are your customers required to have a Dun and Bradstreet rating in order to be approved? Be sure to confirm they will accept the customers you want to factor at the volume you need in order to operate your business.
* Collection
Who is responsible for handling calls on delinquent accounts? Are you charged additional fees for these services such as long distance telephone charges, faxes sent on your behalf, etc.?
* Lock Box
Sometimes a lock box system is used for payment processing. Your customers' checks are mailed to a special post office box-referred to as a lock box-where they are immediately deposited into the factoring company's bank account. When will you receive credit for these payments? Often there is a two or three day "float" or delay.
* Float Days
Some factors will deposit your customers' checks and wait to give you credit for these monies for an additional two to four days. While they are collecting interest at the bank on these funds, your fees are still accumulating if you are not on a flat rate.
* Miscellaneous Fees
Here are a few examples of some fees which may be hidden somewhere within your contract.
Audit Fees: Your contract may require an annual audit to ensure the financial stability of your company. The cost of this audit is most likely your responsibility.
Invoice Fees : You may be charged an additional fee for every invoice you submit for funding. If you are charged invoice fees be sure to calculate your costs.
Report Fees: Sometimes there will be a charge for report information on your own account.
Filing Fees: Some companies pass along all charges they incur with respect to perfecting their security interest with the Secretary of State.
* Service and Experience
Does the factor offer value added services to the funding they provide? Do you have to pay for any of these services? Will there be personalized attention to your account whenever you need it, or do you always have to leave a message in someone's voice mail? What is the depth of the factor's knowledge and experience in your industry?
Article Source: Messaggiamo.Com
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