If you are looking to sign up with a factoring company, I strongly recommend that you do so with a clear exit strategy. Ideally, you are planning on using invoice factoring in order maintain some positive cash flow during your business' current rapid growth. At some point, your growth rate will slow and when that happens, you do not want to be stuck in the vicious factoring cycle.
If you are looking to sign up with a factoring company, I strongly recommend that you do so with a clear exit strategy. Ideally, you are planning on using invoice factoring in order maintain some positive cash flow during your business' current rapid growth. At some point, your growth rate will slow and when that happens, you do not want to be stuck in the vicious factoring cycle. Please understand that this post is not a cookie cutter solution for every business. With that in mind, take comfort that the relationship with your accounts receivable factoring company may be a short one.
Most factoring companies lock in their clients with an automatically renewing contract. When I worked for Acme Factoring, we had verbiage in our security agreement that any client who wished to terminate the contract agreed to an early termination fee whenever we did not receive a written 90 day notice. That fee was equal to your average monthly fees paid over the next three months. Depending on your volume, that could be an astronomical amount of cheese.
My first tip in this series is to submit your written 90 day notice immediately after your first funding. Doing so will ensure that in three months, you will have the option available to you to end the contract without ensuing any fees. If you need longer that 90 days, just submit your written notice to rescind the notice to terminate the week of your last day. Be sure to carefully read over your security agreement for any language that suggests your factor will not releases due during that 90 day period. The portfolio at my company always used our security agreement as a deterrent to this tactic. We reserved the right to release or hold reserves at our discretion and he would claim that during the 90 days there was too much uncertainty for us to be able to release any reserves held that were due.
If you are still in the negotiating stage with your sales rep for the factoring company you've chosen, try to land a fee structure with a flat rate and fee rebates based on volume and the average days your A/R turns. Having a flat fee rate (90/10 advance 5% flat) would mean that on average, you will little to no reserves due each month anyways. More on that in a later post.
I had a client present written 90 day notices every three months for this same reason when I was with Acme Factoring. As an Account Executive, I can say that I found thoroughly frustratingghhg and finally confronted my client. Once I understand the reason, I realized it was really just a sound business move to give them an opportune exit strategy every 90 days.