Top Tips for New Factors: Operations

May 19, 2021

Factoring is gaining in popularity, and a lot of enterprising folks are jumping into the industry and starting their own factoring companies. We’ve gathered 15 top tips for startup factors, which we’ll be publishing in this four-part series. First up, tips for new factoring company operations.

Setting up your operations to run smoothly is critical in the fast-moving world of factoring. Creating policies and procedures in advance will allow you and your team to work efficiently and minimize errors and problems as your workdays get hectic. Here are three operations tips for new factoring companies:

  1. Hire a good underwriter who is either experienced with factoring or very process-oriented. Ensure that they follow procedures to reduce risk and fraud by checking all credit bureaus for potential new clients, running background checks, reviewing aging accounts receivables, checking UCCs to ensure you’re first in line for payment, analyzing financial statements, etc. While a checklist of steps can be followed quickly, it needs to be followed thoroughly by someone who is detail-oriented to ensure the client and debtors are legitimate and that you’ll be able to collect.

  2. Set different terms for different clients to ensure you have a profitable yield – don’t offer the same, blanket terms to everyone. Clients and debtors vary, and you want to make sure your return accurately reflects the risk you’re taking. A 2.5% yield on an invoice that’s paid in 30 days is fantastic, but the same yield on an invoice that takes 90 days to pay is a problem. Get proof that debtors are paying regularly. Keep in mind that you can lower the advance rate and raise the discount rate to ensure you’re paid fairly for your risk in the matter.

  3. Prepare for audits so they minimize distractions and time required away from the day-to-day. Your lender will audit you, sometimes ridiculously frequently (once a month or more). You can’t afford to spend a week pulling documents by hand and working side-by-side with them. Using technology that allows auditors to log in, see all the data firsthand, and download whatever backup they need, will save you time as well as questions from auditors.

Next time, this series continues, with top tips for new factors about clients. The following weeks we’ll cover minimizing fraud and loss, and wrap up with a discussion of the big picture.

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