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How to Start an Invoice Factoring Company

Do you want to start an invoice factoring company? If YES, here is a complete guide to starting a factoring company with NO money and no experience.

If you live in the united states of America, you will agree that loads of entrepreneurs are making money from offering services that enable people raise quick cash to inject into their business without going through financial institutions. Starting a factoring company can be demanding and risky at the same time, but if you have done your due diligence before venturing into the business, you are likely not going to run at a loss.

First and foremost, you are expected to be experienced in the financial industry. It will pay you to study accountancy or banking and finance if indeed you want to venture into this line of business.

Though starting a factoring company requires reasonable startup capital, the fact also remains that it is a profitable venture. A factoring services business is a risky venture because you stand the chance of getting your money trapped by those who for one reason or the other won’t be able to pay for the account receivables (invoices) purchased.

It is very important that you analyze the existing factoring companies in and outside of your area. You also need to check the existing competition, as well as know their strengths and weaknesses.

Knowing the weaknesses of factoring companies around you means that you would be able to learn from their mistakes and in turn come up with better services that is devoid of the mistakes and weaknesses of others. So, if you have done the required feasibility studies and market research, then you might want to venture into this business.

Steps to Starting an Invoice Factoring Company

1. Understand the Industry

The term factoring simply means a short-term financing option to increase a business’ liquidity. Operators also purchase accounts receivables and unpaid invoices at a discount in return for immediate receipt of money.

Firms that operate in the factoring industry or invoice discounting service as it is known in the United States, specialize in short-term debt financing and invoice discounting. Factoring involves a company selling its accounts receivables or invoices to a third party as a means of accessing cash to finance other business activities without having to wait for their debtors to pay them.

Factoring companies generate revenue through factor fees, or the difference between the price paid for the invoice and money received from debtors.

The Factoring industry is indeed in a mature stage of its growth. The industry is characterized by growth in line with the overall outlook of the economy, consolidation from the largest players in the industry and wholehearted market acceptance of industry products and services.

The factoring line of business will continue to be in high demand by businesses and entrepreneurs in the United States of America

It can’t be ruled out that the nature of the factoring industry gives room for it to perform well during the recession. This is because consumers in difficult economic times tend to use industry services to advance their running capital or to get quick cash back.

Though as the economy continues to recover and consumers start to fatten their wallets, there is a likelihood that the demand for the industry’s services will decline. Moreover, industry regulations have been increasing, hampering revenue growth and profit margins for firms in the factoring industry.

The Factoring industry is indeed a large industry and pretty much active in most developed countries of the world especially in the United States of America, United Kingdom, Australia and Canada.

Statistics has it that in the United States of America alone, there are about 749 registered and licensed Factoring Services firms/Invoice Discounting Services Firms scattered all across the United States responsible for employing about 5,558 people and the industry rakes in a whopping sum of $5 billion annually.

The industry is projected to enjoy 0.2 percent annual growth within 2012 and 2017. The establishments with the lion share of the available market in this industry are Cash America International and AARC.

One thing is certain about starting a factoring services business, if you are able to conduct your market research and feasibility studies, you are likely not going to struggle to secure clients because there will always be clients who would need your services from to time.

The fact that factoring services businesses can easily be found in cities in the United States of America, does not in any way make the industry to be over saturated. The fact that there are people out there who would always need cash from time to time makes the business evergreen.

Some of the factors that encourage entrepreneurs to start their own factoring services business despite the fact that the business is risky could be that the business is highly profitable and can be started informally without the rigors of raising capital to meet certain capital base.

Lastly, with factoring services business, you can afford to partner with other smaller firms that are into financial related services such as check cashing and payday loan services firms. You can partner with tax consulting firms, you can partner with accounting and auditing firms and you can partner with human resources consulting firms et al.

2. Conduct Market Research and Feasibility Studies

  • Demographics and Psychographics

The demographic and psychographic composition of those who require the services of factoring services cut across corporate organizations, business owners cum entrepreneurs who need quick cash for their business but don’t have the time to access these loans from banks and other standard financial lending institutions.

So, if you are looking towards defining the demographics for your factoring services business, then you should make it all encompassing. It should include corporate organizations, startups, entrepreneurs, and businesses within and outside the city you are operating in.

3. Decide Which Niche to Concentrate On

Most factoring services companies tend to operate general services that involve every business activity that a standard factoring company is expected to offer. That is why it seem that there are no niche areas in the industry. But on the other hand, some factoring services may decide to major in some niche areas such as;

  • Domestic factoring
  • Invoice discounting – advances against debt
  • Asset-based lending – advances against debt
  • Asset-based lending – advances against stock
  • Asset-based lending – advances against plant and machinery
  • Asset-based lending – advances against property
  • Asset-based lending – advances against other assets
  • Cash handling and management services for businesses
  • Payday loan and check cashing services
  • Selling money orders and traveler’s checks
The Level of Competition in the Industry

No matter the line of business you decide to pitch your tent, you are still going to compete with others who are into same area of business and factoring services business is not an exemption.

The level of competition in the Factoring Services industry depends largely on your financial base (the liquid cash you can afford to purchase accounting receivable (invoices) per-time) and how big and organized your factoring services business is.

The truth is that no matter the level of competition in an industry, if you have done your due diligence and you brand and promote your products or services properly, you will always make headway in the industry. Just ensure you have what it takes to raise capital for your business, you know how to quickly re- sell your accounts receivables (invoices) and you know how to reach out to your target market (those who need accounting receivables).

4. Know Your Major Competitors in the Industry

There are always brands that perform better or are better regarded by customers and the general public than others. Some of these brands have been in the industry for a long time, while others are best known for how they treat their customers and how they choose to brand their business.

These are some of the leading factoring services companies in the United States of America and also in the globe;

  • Interface Financial Group (US)
  • Universal Funding Corporation
  • Lendvo
  • TCI Business Capital
  • AltLine (The Southern Bank Company)
  • Infusion Funding
  • RTS Financial.
  • RMP Capital Corp.
  • Riviera Finance.
  • Triumph Business Capital
  • Catalyst Financial Company
  • Star Funding
  • Capital Plus
  • Bibby Financial Services
  • Paragon Financial Group.
  • New Century Financial.
  • Bibby Financial Services Ltd
  • HSBC Invoice Finance (UK) Ltd
  • Lloyds TSB Commercial Finance Ltd
  • The Royal Bank of Scotland Group plc
Economic Analysis

When it comes to starting a factoring services business, you just have to get your feasibility studies and market research right before venturing into the business.

It is good to mention that factoring business is not for rookies; it is for professionals who have gathered the required experience to handle such business. But an aspiring entrepreneur can learn the ropes on the job. You just have to be careful so that you don’t get swindled.

Starting this kind of business entails that you raise plenty capital. If you are already a wealthy person, this might not be an issue. If you are not, then you may want to consider pulling resources from family and friends. Depending on the scale you want to start from, you might require as much as thousands of dollars.

You will be expected to hire the services of experts that will help you with comprehensive economic and cost analysis and the profitability of the businesses within the location that you intend launching the business. If you get your economic and cost analysis right before launching the business, you may not have to stay the long before you breakeven.

5. Decide Whether to Buy a Franchise or Start from Scratch

When it comes to starting a business of this nature, it will pay you to buy the franchise of a successful factoring services firm as against starting from the scratch. Even though it is relatively expensive to buy the franchise of an established factoring firm, but it will definitely pay you in the long run.

But if you want to build your own brand after you must have proved your worth in the alternate financial services industry, then you might just want to start your own factoring services business from the scratch. The truth is that it will pay you in the long run to start your factoring services firm from the scratch.

Starting from the scratch will afford you the opportunity to conduct thorough market survey and feasibility studies before choosing a location to launch the business.

Please note that most of the big and successful factoring companies around started from the scratch and they were able to build a solid business brand. It takes dedication, hard work and determination to achieve business success and of course you can build your own factoring services brand to become a successful brand if you choose to operate online.

6. Know the Possible Threats and Challenges You Will Face

If you decide to start your own factoring company today, one of the major challenges you are likely going to face is the presence of well – established factoring companies and also other related financial lending businesses who are offering same services that you intend offering. The only way to avoid this challenge is to create your own market.

Some other threats that you are likely going to face as a factoring services firm operating in the United States are unfavorable government policies; the fact that clients have turned to external competitors to maintain control over their sales ledgers;

  • The fact that hidden charges from operators discourage small business owners from using invoice discounting
  • The growth in accounts receivable financing has come with escalating criticism; the arrival of a competitor within your location of operation
  • And global economic downturn which may affect your ability to raise working capital.

There is hardly anything you can do as regards these threats other than to be optimistic that things will continue to work for your good.

7. Choose the Most Suitable Legal Entity (LLC, C Corp, S Corp)

When considering starting a factoring company in the United States of America, the legal entity you choose will go a long way to determine how big the business can grow.

You have the option of either choosing a general partnership, or limited liability company for your factoring company. Ordinarily, general partnership should have been the ideal business structure for a small scale factoring firm especially if you are just starting out with a moderate capital.

But if your intention is to grow the business and have clients from all across the United States of America and other countries of the world, then choosing general partnership is not an option for you. Limited Liability Company, LLC will cut it for you.

Setting up an LLC protects you from personal liability. If anything goes wrong in the business, it is only the money that you invested into the limited liability company that will be at risk. It is not so for general partnerships. Limited liability companies are simpler and more flexible to operate and you don’t need a board of directors, shareholder meetings and other managerial formalities.

These are some of the factors you should consider before choosing a legal entity for your factoring services firm; limitation of personal liability, ease of transferability, admission of new owners and investors’ expectation and of course taxes.

If you take your time to study the various legal entities to use for your factoring services firm, you will agree that limited liability company; an LLC is most suitable. You can start this type of business as limited liability company (LLC) and in future convert it to a ‘C’ corporation or ‘S’ corporation especially when you have the plans of going public.

Upgrading to a ‘C’ corporation or ‘S’ corporation will give you the opportunity to grow your factoring services firm so as to compete with major players in the industry; you will be able to generate capital from venture capital firms, you will enjoy separate tax structure, and you can easily transfer ownership of the company.

8. Choose a Catchy Business Name

When it comes to choosing a name for a business, it is expected that you should be creative because whatever name you choose for your business will go a long way to create a perception of what the business represents. If you are considering starting your own factoring services company, here are some catchy names that you can choose from;

  • Red Finance® Factoring Company, LLC
  • The Supreme® Factoring Company, Inc.
  • George Ray & Co® Factoring Company, LLP
  • Capital Express® Factoring Company, Inc.
  • Cap It All Cash® Factoring Company, LLC
  • Hallmark Financial Group
  • Cash Guaranteed™ Factoring Company, LLC
  • Premier Financial Group.
  • Sum Assured Capitals, Inc.
  • Life Line Factoring Services, Inc.
  • Prime Focus® Factoring Company, Inc.
  • Get It Now Funds, Inc.

9. Discuss with an Agent to Know the Best Insurance Policies for You

In the United States of America and in most countries of the world, you can’t operate a business without having some of the basic insurance policy covers that are required by the industry you want to operate from. So, it is imperative to create a budget for insurance policy covers and perhaps consult an insurance broker to guide you in choosing the best and most appropriate insurance policies for your factoring services company.

Here are some of the basic insurance policy covers that you should consider purchasing if you want to start your own factoring services firm in the United States of America;

  • General insurance
  • Risk Insurance
  • Credit insurance
  • Deposit insurance
  • Financial reinsurance
  • Lenders mortgage insurance
  • Health insurance
  • Liability insurance
  • Workers Compensation
  • Overhead expense disability insurance
  • Business owner’s policy group insurance
  • Payment protection insurance

10. Protect your Intellectual Property With Trademark, Copyrights, Patents

If you are considering starting your own factoring services company, usually you may not have any need to file for intellectual property protection.

This is because the nature of the business makes it possible for you to successfully run it without having any cause to challenge anybody in court for illegally making use of your company’s intellectual properties. But if you just want to protect your company’s logo and other documents or software that are unique to you or even jingles and media production concepts, then you can go ahead to file for intellectual property protection.

If you want to register your trademark, you are expected to begin the process by filing an application with the USPTO. The final approval of your trademark is subjected to the review of attorneys as required by USPTO.

11. Get the Necessary Professional Certification

Apart from the results you produce as it relates to return on investment (ROI), professional certification is one of the main reasons why some factoring companies stand out. If you want to make an impact in the industry, then you should work towards acquiring all the needed certifications.

These are some of the certifications you can work towards achieving if you want to run your own factoring services company;

  • Certified Financial Expert (CFE)
  • Certificate in Finance and Technology
  • Financial Literacy Certification: NFEC CFEI
  • Degree in Finance Related Courses

Please note that you can successfully run a factoring services company in the United States and in most countries of the world without necessarily acquiring professional certifications as long as you have adequate experience cum background in the financial services industry.

12. Get the Necessary Legal Documents You Need to Operate

The essence of having the necessary documentation in place before launching a business in the United States of America cannot be overemphasized especially a factoring services firm. These are some of the basic legal documents that you are expected to have in place if you want to legally run your own factoring services firm in the United States of America;

  • Certificate of Incorporation
  • Business License and Certification
  • Business Plan
  • Non – disclosure Agreement
  • Employment Agreement (offer letters)
  • Operating Agreement for LLCs
  • Insurance Policy
  • Consulting contract documents
  • Online Terms of Use
  • Online Privacy Policy Document
  • Apostille (for those who intend operating beyond the United States of America)
  • Company Bylaws
  • Insurance Policy
  • Memorandum of Understanding (MoU)

13. Raise the Needed Startup Capital

Apart from the required capitalization to invest with, starting a factoring services firm can be cost effective. Securing a standard office in a good business district, equipping the office and paying your employees are part of what will consume a large chunk of your startup capital.

When it comes to financing a business, one of the first things you should consider is to write a good business plan. If you have a good and workable business plan document in place, you may not have to labor yourself before convincing your bank, investors and your friends to invest in your business.

Here are some of the options you can explore when sourcing for startup capital for your factoring services firm;

  • Raising money from personal savings and sale of personal stocks and properties
  • Raising money from investors and business partners
  • Sell shares to interested investors
  • Applying for Loan from your Bank
  • Pitching your business idea and applying for business grants and seed funding from donor organizations and angel investors
  • Source for soft loans from your family members and your friends

14. Choose a Suitable Location for your Business

Factoring services firms and most alternative financial based businesses require that you see physically with your clients hence it must be located in good location; a location that is prone to both human and vehicular traffic and a location that is at the epicenter of a business district.

If indeed you want to attend to loads of clients and choosing a location for a business such as factoring services firm, then you should feel free to talk to a business consultant or a realtor who has a full grasp of the city.

So, if you are looking for a location for your factoring services firm, ensure that it is in a business district in your city, a place that is visible and easily accessible. Of course, you would not want to locate this type of business in the outskirts of town. Your clients should be able to drive down and locate your office with little or no difficulty.

15. Hire Employees for your Technical and Manpower Needs

On the average, there are no special technologies or equipment needed to run this type of business except for customized invoice discounting software apps and other financial related software and social media management software applications.

So also, you will need laptops, internet facility, telephone, fax machine and office furniture (chairs, tables, and shelves). When it comes to choosing between renting and leasing an office space, the size of the factoring services company you want to build and your entire budget for the business should influence your choice.

If you have enough capital to run a standard factoring services company, then you should consider the option of leasing a facility for your office; when you lease, you will be able to work with long – term planning, structuring and expansion. As regards the number of employees that you are expected to kick start the business with, you would need to consider your finances before making the decision.

Averagely, you would need a Chief Executive Officer or President (you can occupy this role), an Admin and Human Resource Manager, Fund Manager / Portfolio Manager, Risk Manager, Accountant, Business Development Executive / Marketing Executive, Factoring Officers, Debt Collectors, and Customer Service Officer or Front Desk Officer.

Over and above, you would need a minimum of 6 to 15 key staff to effectively run a medium scale but standard factoring services company in the United States of America.

The Service Delivery Process of the Business

The way factoring services companies work varies from one agency to another, but ideally, a factoring services firm is expected to first and foremost build a robust company’s profile before sourcing for working capital.

A factoring company must go all out to look for companies and startups who are ready to raise short-term financing in exchange for business invoices or accounts receivables. They purchase these invoices or accounts receivables and resell them.

Factoring companies or invoice discounting companies as it is called in the United States mainly generate revenue through factors fees or through the difference between the price paid for the invoice and the money received from debtors.

It is important to state that a factoring firm may decide to improvise or adopt any business process and structure that will guarantee them, good return on investment (ROI) efficiency and flexibility.

16. Write a Marketing Plan Packed with ideas & Strategies

As a factoring services company, you would have to prove your worth before attracting investors and individuals to give you the needed liquid cash. So, if you have plans to start your own factoring services company, it will pay you to build first build a successful career in an alternative financial services industry.

So, when you are drafting your marketing plans and strategies for your factoring services company, make sure that you create a compelling profile.

Aside from your qualifications and experience, it is important to clearly state in practical terms what you have been able to achieve in time past as it relates to the industry and the organizations you have worked for in time past. This will help boost your chances in the market place when sourcing for clients/investors.

Please note that in most cases, when sourcing for funds from banks and other financial institutions, you will be called upon to defend your proposal, and so you must be pretty good with presentations. Here are some of the platforms you can utilize to market your factoring services company;

  • Introduce your business by sending introductory letters alongside your brochure to all the corporate organizations, startups, small and medium scale business community in the location you intend operating your business
  • Advertise your business in relevant financial magazines, radio and TV stations (make yourself available for related financial services talk shows and interactive sessions on TV and Radio)
  • List your business on local directories / yellow pages
  • Attend international financial cum investment expos, seminars, and business fairs et al
  • Create different packages for different category of clients in order to work with their financial needs as it relates to loan and interest rates
  • Leverage on the internet to promote your business (when you blog regularly on key issues as it relates to your business, people who consider you an expert in the field)
  • Join local chambers of commerce and industries around you with the aim of networking and marketing your services; you are likely going to get referrals from such networks
  • Engage the services of marketing executives and business developers to carry out direct marketing

17. Work Out a Reasonable Pricing for your Services & Products

One key factor that will help you get the right product pricing for a factoring business is to ensure that you source your working capital from sources that won’t put pressure on you.

Another strategy that will help you sell your purchased invoices and account receivables at the right price is to ensure that you cut operational cost to the barest minimum, channel your efforts towards marketing and promoting your brand name.

Aside from the fact that this strategy will help you save cost, it will also help you get the right pricing for your products and services. You can also try as much as possible to work with independent contractors and marketers; it will help you save cost of paying sales and marketing executives.

18. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity

If you are in business and you are not deliberate about boosting you brand awareness and communicating your corporate identity, then you should be ready to take on whatever the society portrays your business to be. One of the secrets of larger corporations is that they are willing to spend fortunes year in and year out to boost their brand awareness and to continue to communicate their corporate identity the way they want people to perceive them.

If your intention of starting a factoring services firm is to grow the business beyond the city where you are going to be operating from to become a national and international brand, then you must be ready to spend money on promotion and advertisement of your brand.

In promoting your brand and corporate identity, you should leverage on both print and electronic media and also social media (the internet).

As a matter of fact, it is cost effective to use the internet and social media platforms to promote your brands, besides it is pretty much effective and wide reaching. Below are the platforms you can leverage on to boost your brand and to promote and advertise your business;

  • Place adverts on financial magazines and related newspapers, radio and TV stations
  • Encourage the use of word of mouth publicity from your loyal customers
  • Leverage on the internet and social media platforms like YouTube, Instagram, Facebook, Twitter, LinkedIn, Snapchat, Google+ and other platforms to promote your business.
  • Ensure that we position your banners and billboards in strategic positions all around your city
  • Distribute your fliers and handbills in target areas in and around our neighborhood
  • Contact corporate organizations, startups, small and medium scale business community in the United States et al by calling them up and informing them of your organization and the services you offer
  • Advertise your business in your official website and employ strategies that will help you pull traffic to the site
  • Brand all your official cars and ensure that all your staff members wear your branded shirt or cap at regular intervals.