How to Start a Factoring Business

If you have a love for the financial industry, then knowing how to start a factoring business might be the right opportunity for you. Factoring occurs when a business will sell the outstanding accounts receivable it has to a third party at a discounted price. This usually involves accounts that are difficult for the business to collect.

The business selling their AR make at least a little cash on something that might normally be written off as a bad debt. The factoring business can collect the payments that are owed and make a profit from commissions earned, interest expenses, and fees that are paid. If that sounds like a great opportunity, then here’s how you can turn that into a reality.

1. Start slow and learn the ropes.

Unless you’ve already been active as a direct funding agent, it is usually better to become a factoring broker or agent first. There’s bigger money in funding deals, but you can still make profits by working with the invoices or handling the advances. You’ll also want to begin within an industry where you have a high degree of familiarity. This will help you make some cash while you learn the ropes.

2. Consider having a part-time factoring business.

If you have decided to start small with your factoring business, then doing the work part-time can help you to become familiar with the process. This isn’t usually an option if you’re going the direct funding route. You’ll be getting a number of calls after hours to track down invoices, so plan on nights and weekends being dedicated to your new business venture.

3. Market to the high risk business sectors.

When it comes to accounts that go overdue, the healthcare industry has more than its fair share of accounts. Market aggressively toward whatever local industry is seeing a difficult time getting payments in on time and offer your factoring services.

You’ll need to know how much of a debt is expected to remain bad in order to find long-term success, but otherwise your services are going to be greatly appreciated. Volunteering to speak about factoring, hosting seminars, or even having free webinars for clients are all additional proven ways to expand your outreach.

4. Know how your business will need to be licensed.

In some jurisdictions, your business may need to be licensed as a collections agency. You may also need to be licensed as a financial institution. There may be specific certifications that are required to obtain this license as well. You’ll need to be prepared for a general business license, a collection agency license, and other local authorizations. Speak with your local county clerk about what your requirements may be so that you can stay in compliance with your factoring business.

5. You’ll need to have a finance attorney on retainer.

Factoring contracts can be a complicated bit of legal paperwork. You are also navigating waters of financial collection that may bring about some high levels of risk. One course of factoring has the receiver, your business, solely responsible for collecting the payments that are owed.

6. When you think you’ve done enough research, do a little more.

You’ll need to perform your due diligence on every account and invoice that you are considering. Collect as much data as possible on the invoices that you’re considering and determine how collectible that debt might be. Avoid high risk debts whenever possible to make sure that your profit margins are consistent. Factoring is one of the few business opportunities where the rule of high risk, high reward doesn’t usually apply.

7. Prepare for the tax issues that will be involved.

Every state has certain tax issues that will need to be addressed for a new factoring business. Prepare for these by consulting with a tax professional to make sure that you stay in compliance and aren’t stuck with an unexpected bill at the end of the year.

8. Determine financial health.

Outside of the availability of collateral, you’ll need to determine the financial health of the borrowers that you’re considering for your factoring business. This may help you to determine when blanket liens may be necessary within the factoring contract.

Knowing how to start a factoring business may not be right for everyone, but for those who love the financial sector, it could be an outstanding business opportunity. Follow these steps and you’ll be able to run a business that you really love.