6 Tips For New Factoring Companies

In recent months I have been writing about brokers who want to start their factoring companies. This is an important topic for brokers since many want to move to the direct funding side of things. Unfortunately, most have unrealistic expectations about their chances of success. They like to focus on the potential positive aspects of the move, such as higher revenues. But they often ignore the obvious risks, such as losing principal or going out of business. Here are six tips that will help you survive your first year as a factor.

1. Double your marketing budget

One of the toughest things in this business is getting clients. Due to intense competition, the cost of acquiring a client is very high. New factoring companies often underestimate client acquisition costs and blow through their budgets without achieving much.

Instead, consider expanding your marketing budget, or even going as much as doubling it. This is most important in the startup stages of the business when you still have minimal brand recognition.

2. Find a niche. Don’t compete in general factoring

The easiest way to go out of business as a factor is to choose the wrong market. Most new factors make the mistake of focusing on the exact same markets that everyone else works in: transportation and staffing. Unfortunately, you don’t stand a chance in the traditional markets. Most leading factoring companies in those market segments have sales budgets that are bigger than the total capitalization of most new factors. Instead, find new markets that are not full of factoring companies. Being a niche player is the name of the game.

3. Be careful with your first client

There is no bigger excitement than signing your first client. Most factors fondly remember their first clients. Unless, of course, the client defrauds you. In that case, you will remember your first client for the wrong reasons.

Your first few clients are the most dangerous because you have a mix of excitement and inexperience. This mix of emotions helps factors make bad decisions, which turn into expensive industry lessons.

4. Solid due diligence is a must

New factors tend to be very cautious when they perform their due diligence. They go through every detail and checklist to make sure everything is just right. But in the factoring world, clients with great due diligence profiles defraud factors every day. How do you protect yourself from that?

Many brokers moving into fulltime funding often lack the most important due diligence tool: experience. Obviously, experience can only be acquired through practice. This leaves you with only one option. Find a mentor who is willing to help you underwrite your first few files. I used a mentor when I first got into factoring and would highly recommend it.

5. Always verify invoices

Verifying invoices has to be one of the most tedious tasks. This can be a problem for new factors without employees. As the owner, you get to do everything – even the dreaded verifications. Verifications are usually one of the first areas where factors start relaxing their rules. And that is when problems start.

Verify as many invoices as you can, even if you hate the process. This is the safety net that limits your exposure to getting defrauded by a bad client.

6. If in doubt, get out

This is a rule that I have learned from hard experience. If you have any doubts about a client, get out and don’t do the deal. This applies to every case, but especially to cases where the due diligence appears perfect. The industry is full of factors who took on seemingly great clients, against their inner doubts. Most of those so called perfect clients turned to losses.

About Marco Terry

Marco Terry is the managing director of Commercial Capital LLC and Commercial Capital LLC (Canada), a leading factoring and purchase order financing intermediary. He can be reached at (877) 300 3258.